Stock Analysis

We Think Nitro Software (ASX:NTO) Can Afford To Drive Business Growth

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ASX:NTO
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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 should Nitro Software (ASX:NTO) shareholders 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Nitro Software

When Might Nitro Software Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Nitro Software last reported its balance sheet in December 2020, it had zero debt and cash worth US$44m. In the last year, its cash burn was US$1.6m. That means it had a cash runway of very many years as of December 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

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ASX:NTO Debt to Equity History March 8th 2021

How Well Is Nitro Software Growing?

It was quite stunning to see that Nitro Software increased its cash burn by 397% over the last year. That does give us pause, and we can't take much solace in the operating revenue growth of 13% in the same time frame. 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. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Nitro Software Raise More Cash Easily?

Nitro Software seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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. 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 US$343m, Nitro Software's US$1.6m in cash burn equates to about 0.5% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About Nitro Software's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Nitro Software is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking an in-depth view of risks, we've identified 2 warning signs for Nitro Software that you should be aware of before investing.

Of course Nitro Software 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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