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, Hornby (LON:HRN) shareholders have done very well over the last year, with the share price soaring by 114%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given its strong share price performance, we think it's worthwhile for Hornby shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Hornby's 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. As at September 2020, Hornby had cash of UK£4.0m and no debt. In the last year, its cash burn was UK£2.0m. Therefore, from September 2020 it had 2.0 years of cash runway. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.
How Well Is Hornby Growing?
Hornby managed to reduce its cash burn by 67% over the last twelve months, which suggests it's on the right flight path. And revenue is up 24% in that same period; also a good sign. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how Hornby has developed its business over time by checking this visualization of its revenue and earnings history.
Can Hornby Raise More Cash Easily?
We are certainly impressed with the progress Hornby 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. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Since it has a market capitalisation of UK£114m, Hornby's UK£2.0m in cash burn equates to about 1.7% 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 Hornby's Cash Burn Situation?
As you can probably tell by now, we're not too worried about Hornby's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. And even though its revenue growth wasn't quite as impressive, it was still a positive. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Hornby that potential shareholders should take into account before putting money into a stock.
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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Hornby PLC, through its subsidiaries, engages in the design, development, sourcing, and distribution of hobby and interactive products in the United Kingdom, the United State, Spain, Italy, and rest of Europe.
Adequate balance sheet and slightly overvalued.