We can readily understand why investors are attracted to unprofitable companies. By way of example, Mirriad Advertising (LON:MIRI) has seen its share price rise 127% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
In light of its strong share price run, we think now is a good time to investigate how risky Mirriad Advertising's cash burn is. 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.
How Long Is Mirriad Advertising's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Mirriad Advertising last reported its balance sheet in June 2020, it had zero debt and cash worth UK£14m. Looking at the last year, the company burnt through UK£9.6m. That means it had a cash runway of around 18 months as of June 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.
How Is Mirriad Advertising's Cash Burn Changing Over Time?
In the last year, Mirriad Advertising did book revenue of UK£1.6m, but its revenue from operations was less, at just UK£1.6m. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 24% over the last year suggests some degree of prudence. 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.
How Hard Would It Be For Mirriad Advertising To Raise More Cash For Growth?
While Mirriad Advertising is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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. 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).
Mirriad Advertising's cash burn of UK£9.6m is about 12% of its UK£78m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
Is Mirriad Advertising's Cash Burn A Worry?
Mirriad Advertising appears to be in pretty good health when it comes to its cash burn situation. 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. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Mirriad Advertising's situation. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Mirriad Advertising that potential shareholders should take into account before putting money into a stock.
Of course Mirriad Advertising 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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