We're Not Worried About OnTheMarket's (LON:OTMP) Cash Burn

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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether OnTheMarket (LON:OTMP) shareholders should 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for OnTheMarket

How Long Is OnTheMarket'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. In July 2020, OnTheMarket had UK£9.8m in cash, and was debt-free. Looking at the last year, the company burnt through UK£1.2m. So it had a cash runway of about 7.9 years from July 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. Depicted below, you can see how its cash holdings have changed over time.

How Well Is OnTheMarket Growing?

OnTheMarket managed to reduce its cash burn by 92% over the last twelve months, which is extremely promising, when it comes to considering its need for cash. And revenue is up 38% in that same period; also a good sign. Considering these factors, we're fairly impressed by its growth trajectory. 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 OnTheMarket Raise More Cash Easily?

While OnTheMarket 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. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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£90m, OnTheMarket's UK£1.2m in cash burn equates to about 1.4% 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 OnTheMarket's Cash Burn Situation?

As you can probably tell by now, we're not too worried about OnTheMarket's cash burn. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. And even its revenue growth was very encouraging. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Separately, we looked at different risks affecting the company and spotted 3 warning signs for OnTheMarket (of which 1 is concerning!) you should know about.

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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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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