Just because a company isn’t making money doesn’t mean the stock will go down. For example, biotechnology and mining exploration companies often lose money for years before succeeding with a new treatment or mineral discovery. However, only a fool would ignore the risk of a loss-making company burning through its cash too quickly.
So the natural question for CarParts.com (NASDAQ:PRTS) shareholders is whether they should be concerned about its cash burn rate. 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.
See our latest analysis for CarParts.com
When might CarParts.com run out of money?
A cash trail is defined as the length of time it would take a business to run out of cash if it continued to spend at its current rate of cash consumption. As of July 2022, CarParts.com had cash of US$15 million and no debt. Last year, its cash burn was $16 million. This means it had a cash trail of around 11 months in July 2022. Notably, analysts expect CarParts.com to break even (at a free cash flow level) in around 13 months. There is therefore a very good chance that he will not need more money, considering that the rate of consumption will decrease during this period. The image below shows how his cash balance has changed over the past few years.
How is CarParts.com growing?
CarParts.com has managed to reduce its cash burn by 70% over the past twelve months, suggesting it is on the right path to flight. And it could also post 15% revenue growth over the same period. We think he’s developing quite well, on second thought. 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 easy can CarParts.com raise funds?
Although CarParts.com appears to be in a pretty good position, it’s still worth considering how easily it could raise more cash, if only to fuel faster growth. Companies can raise capital either through debt or equity. Many companies end up issuing new shares to fund their future growth. By looking at a company’s cash burn relative to its market cap, we get 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.
CarParts.com’s cash burn of $16 million is about 5.3% of its market capitalization of $310 million. Since this is a rather small percentage, it would probably be very easy for the company to finance another year’s growth by issuing new shares to investors, or even taking out a loan.
Is CarParts.com’s cash burn a concern?
As you can probably tell by now, we’re not too worried about CarParts.com’s cash burn. In particular, we believe that the reduction in its consumption of cash is proof that the company is in control of its expenses. While its cash trail gives us reason to pause, the other metrics we’ve discussed in this article paint an overall positive picture. It is clearly very positive to see that analysts expect the company to break even soon. After looking at a range of factors in this article, we’re pretty relaxed about its cash burn, as the company appears to be in a good position to continue funding its growth. A thorough examination of the risks revealed 2 warning signs for CarParts.com readers should consider before committing capital to this title.
Sure CarParts.com may not be the best stock to buy. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.
Valuation is complex, but we help make it simple.
Find out if CarParts.com is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
See the free analysis