Is Cheetah Mobile (NYSE:CMCM) In A Good Position To Invest In Growth?
We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Cheetah Mobile (NYSE:CMCM) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for Cheetah Mobile
Does Cheetah Mobile Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Cheetah Mobile last reported its balance sheet in June 2023, it had zero debt and cash worth CN¥2.1b. Importantly, its cash burn was CN¥431m over the trailing twelve months. Therefore, from June 2023 it had 4.8 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Cheetah Mobile Growing?
Notably, Cheetah Mobile actually ramped up its cash burn very hard and fast in the last year, by 132%, signifying heavy investment in the business. That does give us pause, and we can't take much solace in the operating revenue growth of 15% in the same time frame. Taken together, we think these growth metrics are a little worrying. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Cheetah Mobile has developed its business over time by checking this visualization of its revenue and earnings history.
Can Cheetah Mobile Raise More Cash Easily?
Even though it seems like Cheetah Mobile is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Cheetah Mobile's cash burn of CN¥431m is about 106% of its CN¥405m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
Is Cheetah Mobile's Cash Burn A Worry?
On this analysis of Cheetah Mobile's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Cheetah Mobile (of which 1 is a bit concerning!) you should know about.
Of course Cheetah Mobile may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
