Here's Why We're Not At All Concerned With Booktopia Group's (ASX:BKG) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Booktopia Group (ASX:BKG) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Booktopia Group

When Might Booktopia Group Run Out Of Money?

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 December 2020, Booktopia Group had AU$16m in cash, and was debt-free. In the last year, its cash burn was AU$8.1m. That means it had a cash runway of about 2.0 years as of December 2020. Notably, however, analysts think that Booktopia Group will break even (at a free cash flow level) 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 Booktopia Group Growing?

Notably, Booktopia Group actually ramped up its cash burn very hard and fast in the last year, by 193%, signifying heavy investment in the business. On the bright side, at least operating revenue was up 23% over the same period, giving some cause for hope. Considering both these metrics, we're a little concerned about how the company is developing. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Booktopia Group Raise More Cash Easily?

While Booktopia Group seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Since it has a market capitalisation of AU$335m, Booktopia Group's AU$8.1m in cash burn equates to about 2.4% 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.

How Risky Is Booktopia Group's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Booktopia Group's cash burn. 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. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Booktopia Group CEO is paid..

Of course Booktopia 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.

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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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