We're Hopeful That Deliveroo (LON:ROO) Will Use Its Cash Wisely

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 Deliveroo (LON:ROO) shareholders be worried about its cash burn? 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Deliveroo

How Long Is Deliveroo's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2022, Deliveroo had cash of UK£1.1b and no debt. Looking at the last year, the company burnt through UK£504m. So it had a cash runway of about 2.2 years from June 2022. Importantly, analysts think that Deliveroo will reach cashflow breakeven in 2 years. That means it doesn't have a great deal of breathing room, but it shouldn't really need more cash, considering that cash burn should be continually reducing. You can see how its cash balance has changed over time in the image below.

Is Deliveroo's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Deliveroo actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. We think that it's fairly positive to see that revenue grew 24% in the last twelve months. 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 Deliveroo To Raise More Cash For Growth?

Notwithstanding Deliveroo's revenue growth, it is still important to consider how it could raise more money, if it needs to. 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 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.

Deliveroo's cash burn of UK£504m is about 32% of its UK£1.6b market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

Is Deliveroo's Cash Burn A Worry?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Deliveroo's cash runway was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Deliveroo that investors should know when investing in the stock.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.