Companies Like Rent.com.au (ASX:RNT) Can Afford To Invest In Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Rent.com.au (ASX:RNT) has seen its share price rise 350% over the last year, delighting many shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

In light of its strong share price run, we think now is a good time to investigate how risky Rent.com.au's cash burn is. 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 an examination of the business' cash, relative to its cash burn.

See our latest analysis for Rent.com.au

How Long Is Rent.com.au's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at December 2020, Rent.com.au had cash of AU$1.8m and no debt. In the last year, its cash burn was AU$657k. Therefore, from December 2020 it had 2.8 years of cash runway. Importantly, though, the one analyst we see covering the stock thinks that Rent.com.au will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.

How Well Is Rent.com.au Growing?

Happily, Rent.com.au is travelling in the right direction when it comes to its cash burn, which is down 68% over the last year. And it could also show revenue growth of 19% in the same period. We think it is growing rather well, upon reflection. 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.

How Easily Can Rent.com.au Raise Cash?

We are certainly impressed with the progress Rent.com.au has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Rent.com.au's cash burn of AU$657k is about 0.8% of its AU$78m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About Rent.com.au's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Rent.com.au is burning through its cash. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. And even though its revenue growth 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 at least one analyst is forecasting it will reach breakeven before too long. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. Taking an in-depth view of risks, we've identified 5 warning signs for Rent.com.au that you should be aware of before investing.

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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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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