Here's Why We're Not Too Worried About Bakkt Holdings' (NYSE:BKKT) Cash Burn Situation
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Bakkt Holdings (NYSE:BKKT) 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Bakkt Holdings
Does Bakkt Holdings 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 Bakkt Holdings last reported its balance sheet in June 2021, it had zero debt and cash worth US$50m. Looking at the last year, the company burnt through US$49m. Therefore, from June 2021 it had roughly 12 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. You can see how its cash balance has changed over time in the image below.
How Is Bakkt Holdings' Cash Burn Changing Over Time?
In our view, Bakkt Holdings doesn't yet produce significant amounts of operating revenue, since it reported just US$33m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With cash burn dropping by 11% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. In reality, this article only makes a short study of the company's growth data. You can take a look at how Bakkt Holdings has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Bakkt Holdings Raise Cash?
While Bakkt Holdings is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Since it has a market capitalisation of US$9.3b, Bakkt Holdings' US$49m in cash burn equates to about 0.5% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is Bakkt Holdings' Cash Burn Situation?
The good news is that in our view Bakkt Holdings' cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash burn reduction, while on the other it can also boast very strong cash burn relative to its market cap. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Bakkt Holdings' situation. An in-depth examination of risks revealed 2 warning signs for Bakkt Holdings that readers should think about before committing capital to this stock.
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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.
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