There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should SecureWorks (NASDAQ:SCWX) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
Does SecureWorks Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at October 2022, SecureWorks had cash of US$139m and no debt. Looking at the last year, the company burnt through US$57m. So it had a cash runway of about 2.4 years from October 2022. That’s decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
Is SecureWorks’ Revenue Growing?
We’re hesitant to extrapolate on the recent trend to assess its cash burn, because SecureWorks 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 13%. 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 SecureWorks Raise More Cash Easily?
Given its problematic fall in revenue, SecureWorks shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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.
SecureWorks has a market capitalisation of US$732m and burnt through US$57m last year, which is 7.8% of the company’s market value. That’s a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is SecureWorks’ Cash Burn A Worry?
It may already be apparent to you that we’re relatively comfortable with the way SecureWorks is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its falling revenue wasn’t great, the other factors mentioned in this article more than make up for weakness on that measure. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don’t think they should be worried. Separately, we looked at different risks affecting the company and spotted 2 warning signs for SecureWorks (of which 1 is significant!) you should know about.
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)
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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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