A company can be growing fast, winning customers and still be running down its cash. How quickly that happens is measured by the cash burn rate. It is usually discussed with young start-ups, but in a world where even the largest technology companies are spending record sums on AI, it has become a number every investor should understand.
What cash burn rate is
Cash burn rate is the speed at which a company spends more cash than it brings in, usually measured per month or per quarter. If a business takes in £5 million a month but pays out £8 million, its net burn is £3 million a month. Gross burn simply means the total cash going out each month, before counting any money coming in.
Closely linked is the idea of runway: how long the company can keep going at its current burn before the cash runs out. If it has £36 million in the bank and burns £3 million a month, it has about 12 months of runway, unless it raises more money or cuts spending.
Why it matters
Cash pays the bills. A company reporting healthy profits on paper can still get into trouble if its cash is draining away, because accounting profit includes items that are not cash, and big investment spending often hits cash long before it shows up in costs. That is why investors look closely at free cash flow alongside earnings.
For smaller companies, a high burn rate with a short runway often means they will need to raise money soon, either by borrowing or by issuing new shares. New shares dilute existing holders, so the share price can suffer in anticipation.
For large, established companies, the question is different. They rarely risk running out of money, but if spending races ahead of the cash their business generates, investors start to ask how long it will take for that investment to pay back, and they may value the shares less generously in the meantime.
A simple example
Imagine two software companies, each with £100 million in cash. One burns £2 million a month and is growing revenue quickly, giving it roughly four years of runway. The other burns £10 million a month, giving it under a year. Even if both are growing at the same pace, the second company is under far more pressure, and its share price is likely to react far more sharply to any disappointment.
How traders use it
Traders and investors check the cash flow statement in results, not just the income statement. They look at operating cash flow, capital spending and the resulting free cash flow, and compare the trend with previous quarters. A burn rate that is shrinking as revenue grows is usually a good sign. A burn that is accelerating without matching revenue growth is a warning.
They also listen to management guidance on future spending. When a company raises its spending plans sharply, the market often reacts more to the cash implications than to the headline growth.
Common mistakes
A common mistake is focusing on revenue growth and ignoring the cash needed to achieve it. Another is assuming that because a company is large, its cash position does not matter to the share price. A third is forgetting that cash on the balance sheet can be offset by debt, so the real cushion may be smaller than it looks.
The bottom line
Cash burn rate tells you how fast a company is using up its money, and runway tells you how long it can keep going. Both are simple ideas, but they explain a lot about why growth shares can fall even when sales are booming. If you want to see how you would weigh numbers like these, the free Samuel & Co Trading Trader Assessment is a good next step.
