Companies Like Tinybeans Group (ASX:TNY) Are In A Position To Invest In Growth

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 Tinybeans Group (ASX:TNY) shareholders should be worried about its cash burn. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Tinybeans Group

Does Tinybeans Group Have A Long 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. In June 2021, Tinybeans Group had US$2.2m in cash, and was debt-free. Importantly, its cash burn was US$1.6m over the trailing twelve months. That means it had a cash runway of around 16 months as of June 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Tinybeans Group Growing?

We reckon the fact that Tinybeans Group managed to shrink its cash burn by 21% over the last year is rather encouraging. Having said that, the revenue growth of 95% was considerably more inspiring. It seems to be growing nicely. In reality, this article only makes a short study of the company's growth data. You can take a look at how Tinybeans Group is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Tinybeans Group To Raise More Cash For Growth?

Even though it seems like Tinybeans Group is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Tinybeans Group has a market capitalisation of US$36m and burnt through US$1.6m last year, which is 4.5% of the company's market value. 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.

Is Tinybeans Group's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Tinybeans Group is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. Its weak point is its cash runway, but even that wasn't too bad! Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Tinybeans Group (1 is a bit concerning!) that you should be aware of before investing here.

Of course Tinybeans Group may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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