Even when a company loses money, it is possible for shareholders to make money if they buy a good company at the right price. For example, although Amazon.com posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. That said, unprofitable businesses are risky because they could potentially burn all their money and get into trouble.
So should REE Automotive (NASDAQ:REE) Are shareholders worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. We will start by comparing its cash consumption with its cash reserves in order to calculate its cash trail.
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When could REE Automotive run out of money?
You can calculate a company’s cash trail by dividing the amount of cash it has on hand by the rate at which it spends that money. As of June 2022, REE Automotive had $207 million in cash and no debt. Last year, its cash burn was $114 million. This means it had a cash trail of around 22 months as of June 2022. While that cash trail isn’t too much of a concern, sane holders would look away and consider what would happen if the company ran out of cash. silver. The image below shows how his cash balance has changed over the past few years.
How is REE Automotive’s cash burn changing over time?
REE Automotive has not recorded any sales in the last year, indicating that it is a start-up company that is still developing its business. Nonetheless, we can still look at its cash burn trajectory as part of our assessment of its cash burn situation. Remarkably, it has actually increased its cash burn by 314% over the past year. Given this large increase in expenses, the company’s cash trail will quickly shrink as it depletes its cash reserves. While the past is always worth studying, it is the future that matters most. You might want to take a look at the company’s expected growth over the next few years.
How difficult would it be for REE Automotive to raise more cash for growth?
Given its cash-burning trajectory, REE Automotive shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. Issuing new shares or going into debt are the most common ways for a listed company to raise more funds for its business. Many companies end up issuing new shares to fund their future growth. By looking at a company’s cash burn relative to its market capitalization, we gain insight into how much of a shareholder base would be diluted if the company needed to raise enough cash to cover a company’s cash burn. another year.
REE Automotive has a market capitalization of $147 million and spent $114 million last year, or 78% of the company’s market value. This is a very high expense relative to the size of the company, suggesting this is an extremely high risk stock.
Is REE Automotive’s cash burn a concern?
Even though its growing cash burn makes us a bit nervous, we are bound to mention that we thought REE Automotive’s cash lead was relatively promising. After reviewing this range of metrics, we think shareholders should be extra careful about how the company uses its cash, because cash burn makes us uncomfortable. On another note, REE Automotive has 5 warning signs (and 3 that are significant) that we think you should know about.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.