Here's Why We're Not Too Worried About Audioboom Group's (LON:BOOM) Cash Burn Situation

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. Indeed, Audioboom Group (LON:BOOM) stock is up 233% in the last year, providing strong gains for shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

In light of its strong share price run, we think now is a good time to investigate how risky Audioboom Group's cash burn is. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Audioboom Group

How Long Is Audioboom Group's Cash Runway?

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. When Audioboom Group last reported its balance sheet in December 2020, it had zero debt and cash worth US$3.3m. In the last year, its cash burn was US$3.2m. That means it had a cash runway of around 12 months as of December 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is Audioboom Group Growing?

It was fairly positive to see that Audioboom Group reduced its cash burn by 37% during the last year. And considering that its operating revenue gained 20% during that period, that's great to see. It seems to be growing nicely. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

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

Even though it seems like Audioboom Group is developing its business nicely, we still like to consider how easily it could raise more money to accelerate 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.

Audioboom Group's cash burn of US$3.2m is about 2.1% of its US$151m 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.

So, Should We Worry About Audioboom Group's Cash Burn?

The good news is that in our view Audioboom Group's cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash burn reduction, while on the other it can also boast very strong cash burn relative to its market cap. 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 a deeper dive, we've spotted 3 warning signs for Audioboom Group you should be aware of, and 1 of them makes us a bit uncomfortable.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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