We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Fitbit (NYSE:FIT) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does Fitbit Have A Long Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In June 2019, Fitbit had US$565m in cash, and was debt-free. Looking at the last year, the company burnt through US$8.8m. That means it had a cash runway of very many years as of June 2019. Notably, however, analysts think that Fitbit will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.
How Well Is Fitbit Growing?
Given our focus on Fitbit's cash burn, we're delighted to see that it reduced its cash burn by a nifty 88%. And it could also show revenue growth of 2.6% in the same period. It seems to be growing nicely. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can Fitbit Raise More Cash Easily?
We are certainly impressed with the progress Fitbit has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
Since it has a market capitalisation of US$969m, Fitbit's US$8.8m in cash burn equates to about 0.9% 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.
Is Fitbit's Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Fitbit's cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. Its weak point is its revenue growth, but even that wasn't too bad! One real positive is that analysts are forecasting that the company will reach breakeven. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Fitbit CEO receives in total remuneration.
Of course Fitbit 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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