Stock Analysis

We're Hopeful That Hornby (LON:HRN) Will Use Its Cash Wisely

  •  Updated
AIM:HRN
Source: Shutterstock

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 Hornby (LON:HRN) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Hornby

Does Hornby Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at September 2020, Hornby had cash of UK£4.0m and no debt. Importantly, its cash burn was UK£2.0m over the trailing twelve months. So it had a cash runway of about 2.0 years from September 2020. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
AIM:HRN Debt to Equity History May 24th 2021

How Well Is Hornby Growing?

Happily, Hornby is travelling in the right direction when it comes to its cash burn, which is down 67% over the last year. And revenue is up 24% in that same period; also a good sign. 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 Hornby has developed its business over time by checking this visualization of its revenue and earnings history.

Can Hornby Raise More Cash Easily?

While Hornby seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Hornby's cash burn of UK£2.0m is about 2.1% of its UK£96m market capitalisation. 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?

It may already be apparent to you that we're relatively comfortable with the way Hornby is burning through its cash. 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. 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 Hornby 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.

If you decide to trade Hornby, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether Hornby is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis