Yahoo Finance We're Not Worried About DigitalOcean Holdings' (NYSE:DOCN) Cash Burn
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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should DigitalOcean Holdings (NYSE:DOCN) shareholders be worried about its 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for DigitalOcean Holdings
When Might DigitalOcean Holdings Run Out Of Money?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at March 2021, DigitalOcean Holdings had cash of US$560m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was US$35m over the trailing twelve months. So it had a very long cash runway of many years from March 2021. Notably, however, analysts think that DigitalOcean Holdings will break even (at a free cash flow level) 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 DigitalOcean Holdings Growing?
It was fairly positive to see that DigitalOcean Holdings reduced its cash burn by 28% during the last year. On top of that, operating revenue was up 33%, making for a heartening combination It seems to be growing nicely. 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 Easily Can DigitalOcean Holdings Raise Cash?
While DigitalOcean Holdings seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. 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.
DigitalOcean Holdings has a market capitalisation of US$5.5b and burnt through US$35m last year, which is 0.6% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is DigitalOcean Holdings' Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way DigitalOcean Holdings is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. 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 1 warning sign for DigitalOcean Holdings that readers should think about before committing capital to this stock.
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This article by Simply Wall St is general in nature. 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.
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