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, 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, the natural question for REE Automotive (NASDAQ:REE) shareholders is whether they should be concerned by its rate of 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’.
See our latest analysis for REE Automotive
When Might REE Automotive Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When REE Automotive last reported its balance sheet in March 2022, it had zero debt and cash worth US$239m. Looking at the last year, the company burned through US$93m. Therefore, from March 2022 it had 2.6 years of cash runway. Notably, analysts forecast that REE Automotive will break even (at a free cash flow level) in about 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.
How Is REE Automotive’s Cash Burn Changing Over Time?
Because REE Automotive isn’t currently generating revenue, we consider it an early-stage business. Nevertheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Its cash burn positively exploded in the last year, up 409%. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For REE Automotive To Raise More Cash For Growth?
While REE Automotive does have a solid cash runway, its cash burn trajectory may have some shareholders thinking 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 capitalization to get a sense for how many new shares a company would have to issue to fund one year’s operations.
REE Automotive has a market capitalization of US$296m and burnt through US$93m last year, which is 32% of the company’s market value. That’s fairly notable cash burn, so if the company had to sell shares to cover the cost of another year’s operations, shareholders would suffer some costly dilution.
How Risky Is REE Automotive’s Cash Burn Situation?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought REE Automotive’s cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Even though we don’t think it has a problem with its cash burn, the analysis we’ve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Taking a deeper dive, we’ve spotted 3 warning signs for REE Automotive you should be aware of, and 1 of them is a bit unpleasant.
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)
Have feedback on this article? Concerned about the content? get in touch with us directly. Alternatively, email editorial-team(at)simplywallst.com.
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.