Stock Analysis

Companies Like Made.com Group (LON:MADE) Can Afford To Invest In Growth

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LSE:MADE
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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. 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 Made.com Group (LON:MADE) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Made.com Group

How Long Is Made.com Group's 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. In December 2021, Made.com Group had UK£107m in cash, and was debt-free. Importantly, its cash burn was UK£34m over the trailing twelve months. So it had a cash runway of about 3.2 years from December 2021. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

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LSE:MADE Debt to Equity History March 10th 2022

Is Made.com Group's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Made.com Group actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. As it happens, shareholders have good reason to be optimistic about the future since the company increased its operating revenue by 50% over the last year. 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.

How Hard Would It Be For Made.com Group To Raise More Cash For Growth?

There's no doubt Made.com Group's revenue growth is impressive but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Made.com Group has a market capitalisation of UK£312m and burnt through UK£34m last year, which is 11% of the company's market value. 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 Made.com Group's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Made.com Group is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. And even though its cash burn relative to its market cap wasn't quite as impressive, it was still a positive. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Taking an in-depth view of risks, we've identified 1 warning sign for Made.com Group that you should be aware of before investing.

Of course Made.com Group 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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