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, 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we’d take a look at whether Blue Prism Group (LON:PRSM) shareholders should be worried about its cash burn. For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let’s start with an examination of the business’s cash, relative to its cash burn.
How Long Is Blue Prism Group’s Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In April 2019, Blue Prism Group had UK£129m in cash, and was debt-free. Importantly, its cash burn was UK£25m over the trailing twelve months. That means it had a cash runway of about 5.1 years as of April 2019. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
Is Blue Prism Group’s Revenue Growing?
We’re hesitant to extrapolate on the recent trend to assess its cash burn, because Blue Prism Group actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Notably, its strong revenue growth of 91% over the last year is genuinely cause for optimism. 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.
Can Blue Prism Group Raise More Cash Easily?
While Blue Prism Group’s revenue growth truly does shine bright, it’s important not to ignore the possibility that it might need more cash, at some point, even if only to optimise its growth plans. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Blue Prism Group’s cash burn of UK£25m is about 3.3% of its UK£765m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Blue Prism Group’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about Blue Prism Group’s cash burn. For example, we think its revenue growth suggests that the company is on a good path. And even its cash burn relative to its market cap was very encouraging. Taking all the factors in this report into account, we’re not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. While it’s important to consider hard data like the metrics discussed above, many investors would also be interested to note that Blue Prism Group insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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.
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