Here's Why We're Watching Marin Software's (NASDAQ:MRIN) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Marin Software (NASDAQ:MRIN) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Marin Software

When Might Marin Software Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at March 2022, Marin Software had cash of US$42m and no debt. Looking at the last year, the company burnt through US$12m. So it had a cash runway of about 3.6 years from March 2022. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Marin Software Growing?

At first glance it's a bit worrying to see that Marin Software actually boosted its cash burn by 47%, year on year. Also concerning, operating revenue was actually down by 16% in that time. Taken together, we think these growth metrics are a little worrying. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Marin Software has developed its business over time by checking this visualization of its revenue and earnings history.

Can Marin Software Raise More Cash Easily?

While Marin Software seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Marin Software's cash burn of US$12m is about 38% of its US$31m 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 Marin Software's Cash Burn A Worry?

On this analysis of Marin Software's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Marin Software that potential shareholders should take into account before putting money into a 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. 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.