Rhinomed (ASX:RNO) Is In A Strong Position To Grow Its Business

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 software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Rhinomed (ASX:RNO) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Rhinomed

Does Rhinomed Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Rhinomed last reported its balance sheet in December 2021, it had zero debt and cash worth AU$1.6m. Looking at the last year, the company burnt through AU$271k. So it had a cash runway of about 5.9 years from December 2021. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

How Well Is Rhinomed Growing?

Given our focus on Rhinomed's cash burn, we're delighted to see that it reduced its cash burn by a nifty 94%. And revenue is up 48% in that same period; also a good sign. Overall, we'd say its growth is rather impressive. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how Rhinomed is building its business over time.

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

We are certainly impressed with the progress Rhinomed 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. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of AU$52m, Rhinomed's AU$271k in cash burn equates to about 0.5% of its market value. 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 Rhinomed's Cash Burn?

As you can probably tell by now, we're not too worried about Rhinomed's cash burn. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. And even its revenue growth was very encouraging. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. On another note, we conducted an in-depth investigation of the company, and identified 7 warning signs for Rhinomed (3 don't sit too well with us!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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.