There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. 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 Cue Health (NASDAQ:HLTH) 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. Let’s start with an examination of the business’ cash, relative to its cash burn.
See our latest analysis for Cue Health
How Long Is Cue Health’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2023, Cue Health had cash of US$178m and no debt. Looking at the last year, the company burnt through US$255m. That means it had a cash runway of around 8 months as of March 2023. Notably, analysts forecast that Cue Health 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. You can see how its cash balance has changed over time in the image below.
How Well Is Cue Health Growing?
One thing for shareholders to keep front in mind is that Cue Health increased its cash burn by 525% in the last twelve months. That’s pretty alarming given that operating revenue dropped 55% over the last year, though the business is likely attempting a strategic pivot. Considering these two factors together makes us nervous about the direction the company seems to be heading. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Cue Health To Raise More Cash For Growth?
Since Cue Health’s revenue is down, and its cash burn is up, shareholders would quite reasonably be considering whether it can raise more money easily, if need be. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Cue Health’s cash burn of US$255m is about 396% of its US$64m market capitalisation. Given just how high that expenditure is, relative to the company’s market value, we think there’s an elevated risk of funding distress, and we would be very nervous about holding the stock.
Is Cue Health’s Cash Burn A Worry?
There are no prizes for guessing that we think Cue Health’s cash burn is a bit of a worry. Take, for example, its cash burn relative to its market cap, which suggests the company may have difficulty funding itself, in the future. And although we accept its cash runway wasn’t as worrying as its cash burn relative to its market cap, it was still a real negative; as indeed were all the factors we considered in this article. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. On another note, Cue Health has 5 warning signs (and 1 which shouldn’t be ignored) we think you should know about.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
What are the risks and opportunities for Cue Health?
Trading at 98% below our estimate of its fair value
Highly volatile share price over the past 3 months
Does not have a meaningful market cap ($67M)
Shareholders have been diluted in the past year
Has less than 1 year of cash runway
Currently unprofitable and not forecast to become profitable over the next 3 years
View all Risks and Rewards
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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.