Simply Wall St

Companies like C3.ai (NYSE:AI) are able to invest in growth

There is no doubt that it is possible to make money by owning shares of unprofitable companies. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.

So the natural question for C3.ai (NYSE:AI) shareholders is whether they should be concerned about its cash burn rate. 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. Let’s start with a review of the company’s cash flow, relative to its cash burn.

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Does C3.ai have a long cash trail?

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. When C3.ai released its last balance sheet in July 2022, it had no debt and cash worth $907 million. Importantly, its cash burn was US$146 million over the last twelve months. Therefore, as of July 2022, it had 6.2 years of cash trail. While this is just a measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. It is important to note that if we extrapolate recent cash consumption trends, the cash trail would be significantly longer. You can see how his cash balance has changed over time in the image below.

NYSE: AI Debt to Equity History October 16, 2022

How is C3.ai growing?

Notably, C3.ai has actually increased its cash burn very hard and fast over the past year, by 162%, which signifies a significant investment in the business. On the bright side, at least operating revenue has increased by 36% over the same period, which gives hope. In light of the above data, we are quite optimistic about the company’s growth trajectory. Obviously, however, the crucial factor is whether the company will expand its business in the future. You might want to take a look at the company’s expected growth over the next few years.

How easily can C3.ai raise funds?

While C3.ai appears to be in a pretty good position, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. In general, a listed company can raise new funds by issuing shares or by going into debt. 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.

C3.ai has a market cap of $1.3 billion and spent $146 million last year, or 11% of the company’s market value. As a result, we risk the company being able to raise more cash for growth without too much trouble, but at the cost of some dilution.

Is C3.ai’s cash burn a concern?

On this analysis of C3.ai’s cash burn, we think its cash trail was reassuring, while its growing cash burn worries us a bit. Given all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we think shareholders should keep an eye on how it’s doing. A thorough examination of the risks revealed 2 warning signs for C3.ai readers should consider before committing capital to this title.

If you prefer to consult another company with better fundamentals, do not miss this free list of interesting companies, which have a high return on equity and low debt or this list of stocks which should all grow.

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.

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