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Companies Like RomReal (OB:ROM) Can Afford To Invest In Growth

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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for RomReal (OB:ROM) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business's cash, relative to its cash burn.

See our latest analysis for RomReal

Does RomReal Have A Long 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. When RomReal last reported its balance sheet in September 2019, it had zero debt and cash worth €2.5m. Looking at the last year, the company burnt through €741k. That means it had a cash runway of about 3.4 years as of September 2019. 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.

OB:ROM Historical Debt, January 7th 2020
OB:ROM Historical Debt, January 7th 2020

How Is RomReal's Cash Burn Changing Over Time?

Whilst it's great to see that RomReal has already begun generating revenue from operations, last year it only produced €164k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. The 60% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. RomReal makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Hard Would It Be For RomReal To Raise More Cash For Growth?

There's no doubt RomReal's rapidly reducing cash burn brings comfort, 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. Many companies end up issuing new shares to fund future 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).

RomReal has a market capitalisation of €10m and burnt through €741k last year, which is 7.4% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is RomReal's Cash Burn Situation?

As you can probably tell by now, we're not too worried about RomReal's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn relative to its market cap was also very reassuring. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what RomReal's CEO gets paid each year.

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.

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