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. By way of example, Samsara (NYSE:IOT) has seen its share price rise 188% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So notwithstanding the buoyant share price, we think it’s well worth asking whether Samsara’s cash burn is too risky. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
Does Samsara 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 July 2023, Samsara had US$725m in cash, and was debt-free. Importantly, its cash burn was US$21m over the trailing twelve months. So it had a very long cash runway of many years from July 2023. Importantly, though, analysts think that Samsara will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Samsara Growing?
Samsara managed to reduce its cash burn by 90% over the last twelve months, which is extremely promising, when it comes to considering its need for cash. And revenue is up 46% in that same period; also a good sign. Considering these factors, we’re fairly impressed by its growth trajectory. 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.
How Hard Would It Be For Samsara To Raise More Cash For Growth?
We are certainly impressed with the progress Samsara 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. 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.
Samsara’s cash burn of US$21m is about 0.1% of its US$14b market capitalisation. So it could almost certainly just borrow a little to fund another year’s growth, or else easily raise the cash by issuing a few shares.
So, Should We Worry About Samsara’s Cash Burn?
It may already be apparent to you that we’re relatively comfortable with the way Samsara is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. And even its revenue growth was very encouraging. It’s clearly very positive to see that analysts are forecasting the company will break even fairly soon. After considering a range of factors in this article, we’re pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. An in-depth examination of risks revealed 3 warning signs for Samsara that readers should think about before committing capital to this stock.
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)
What are the risks and opportunities for Samsara?
Revenue is forecast to grow 20.32% per year
Shareholders have been diluted in the past year
Significant insider selling over the past 3 months
Currently unprofitable and not forecast to become profitable over the next 3 years
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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.