Companies Like Diurnal Group (LON:DNL) Can Afford To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Diurnal Group (LON:DNL) shareholders 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 Diurnal Group

How Long Is Diurnal Group'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. Diurnal Group has such a small amount of debt that we'll set it aside, and focus on the UK£20m in cash it held at December 2020. Looking at the last year, the company burnt through UK£4.1m. That means it had a cash runway of about 4.9 years as of December 2020. Notably, however, analysts think that Diurnal Group will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

How Well Is Diurnal Group Growing?

We reckon the fact that Diurnal Group managed to shrink its cash burn by 50% over the last year is rather encouraging. But it was the operating revenue growth of 218% that really shone. It seems to be growing nicely. 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 Diurnal Group Raise More Cash Easily?

We are certainly impressed with the progress Diurnal Group 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Diurnal Group's cash burn of UK£4.1m is about 5.2% of its UK£80m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Diurnal Group's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Diurnal Group is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. And even its cash burn reduction was very encouraging. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. 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. An in-depth examination of risks revealed 1 warning sign for Diurnal Group that readers should think about before committing capital to this stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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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