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Companies Like Maestrano Group (LON:MNO) Can Be Considered Quite Risky

Simply Wall St

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Maestrano Group (LON:MNO) 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.

View our latest analysis for Maestrano Group

When Might Maestrano Group Run Out Of Money?

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. When Maestrano Group last reported its balance sheet in June 2019, it had zero debt and cash worth UK£2.2m. Looking at the last year, the company burnt through UK£3.0m. Therefore, from June 2019 it had roughly 9 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

AIM:MNO Historical Debt, December 4th 2019

How Well Is Maestrano Group Growing?

Notably, Maestrano Group actually ramped up its cash burn very hard and fast in the last year, by 110%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 7.4%, making us very wary indeed. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Maestrano Group is building its business over time.

Can Maestrano Group Raise More Cash Easily?

Maestrano Group revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. 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 to drive 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.

Maestrano Group's cash burn of UK£3.0m is about 136% of its UK£2.2m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

Is Maestrano Group's Cash Burn A Worry?

As you can probably tell by now, we're rather concerned about Maestrano Group's cash burn. In particular, we think its cash burn relative to its market cap suggests it isn't in a good position to keep funding growth. And although we accept its falling revenue wasn't as worrying as its cash burn relative to its market cap, it was still a real negative; as indeed were all the factors we considered in this article. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Maestrano Group insiders have been trading shares in the company. Click here to find out if they have been buying or selling.

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)

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.