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We're Not Very Worried About GetSwift's (ASX:GSW) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether GetSwift (ASX:GSW) shareholders should 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. Let's start with an examination of the business's cash, relative to its cash burn.

View our latest analysis for GetSwift

How Long Is GetSwift's 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 GetSwift last reported its balance sheet in December 2019, it had zero debt and cash worth AU$58m. Importantly, its cash burn was AU$24m over the trailing twelve months. That means it had a cash runway of about 2.4 years as of December 2019. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.

ASX:GSW Historical Debt, March 11th 2020
ASX:GSW Historical Debt, March 11th 2020

How Is GetSwift's Cash Burn Changing Over Time?

In the last year, GetSwift did book revenue of AU$4.4m, but its revenue from operations was less, at just AU$4.4m. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. Over the last year its cash burn actually increased by 19%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how GetSwift is growing revenue over time by checking this visualization of past revenue growth.

Can GetSwift Raise More Cash Easily?

Given its cash burn trajectory, GetSwift shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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 AU$81m, GetSwift's AU$24m in cash burn equates to about 30% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

So, Should We Worry About GetSwift's Cash Burn?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought GetSwift's cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking a deeper dive, we've spotted 5 warning signs for GetSwift you should be aware of, and 1 of them is a bit concerning.

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

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.

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. Thank you for reading.

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