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Can U.S. Auto Parts Network (NASDAQ:PRTS) Afford 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should U.S. Auto Parts Network (NASDAQ:PRTS) 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for U.S. Auto Parts Network

When Might U.S. Auto Parts Network Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In June 2019, U.S. Auto Parts Network had US$890k in cash, and was debt-free. Looking at the last year, the company burnt through US$4.9m. Therefore, from June 2019 it had roughly 2 months of cash runway. To be frank we are alarmed by how short that cash runway is! The image below shows how its cash balance has been changing over the last few years.

NasdaqGS:PRTS Historical Debt, October 2nd 2019
NasdaqGS:PRTS Historical Debt, October 2nd 2019

Is U.S. Auto Parts Network's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because U.S. Auto Parts Network actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 5.1%. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can U.S. Auto Parts Network Raise More Cash Easily?

Since its revenue growth is moving in the wrong direction, U.S. Auto Parts Network shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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$55m, U.S. Auto Parts Network's US$4.9m in cash burn equates to about 8.9% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is U.S. Auto Parts Network's Cash Burn A Worry?

On this analysis of U.S. Auto Parts Network's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: U.S. Auto Parts Network insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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