As important as it is to identify promising stocks, it is equally important, if not more important, to avoid bad ones. One area of consideration is its available cash levels and the rate of cash consumption, which is known as the burn rate.
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As important as it is to identify promising stocks, it is equally important, if not more important, to avoid bad ones. One area of consideration is its available cash levels and the rate of cash consumption, which is known as the burn rate.
Two popular means of measuring a company’s cash flow are cash from operations and free cash flow. Operating cash flow measures a company’s ability to generate and consume cash from day-to-day operations. Positive cash flow from operations implies that a firm is able to generate enough cash. Negative cash flow from operations indicates that additional cash inflows are necessary for day-to-day operations. Free cash flow refines the measure of cash flow from operations by considering capital expenditures as well as dividend payments to shareholders.
A company’s “burn rate” indicates the net amount of cash it’s consuming in its operations and development. By relating the negative free cash flow to the level of available cash, we can provide a rough estimate of how long a company can operate before other actions are necessary. The months until burnout figure indicates the number of months of operation supported by cash levels tied to the cash from operations and free cash flow deficit.
A low number of months to burnout does not necessarily mean that a company will run out of cash. It does indicate that, if operational elements do not improve, the company will need to seek alternative actions or additional financing. As an investor, you should be wary of firms with high cash burn rates, as it indicates that the company may be vulnerable unless outside financing is arranged.
This month’s First Cut shows the 20 companies with the lowest cash burn rate. Financials, utilities and real estate investment trusts (REITs) were excluded because of the nature of their business and/or the uniqueness of their financial statements. Foreign stocks were excluded for similar reasons. Dashes (--) mean the company has positive cash flow from operations.
Burn Rate - Months to Live:
IIF([Free cash flow/share 12m]<0,([Cash & Mrk Sec per Shr Q1] / abs([Free cash flow/share 12m]))*12,null)
First Cut Stocks
Computerized Investing
Growth Investing
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