There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Rubicon Project (NYSE:RUBI) shareholders have done very well over the last year, with the share price soaring by 153%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given its strong share price performance, we think it's worthwhile for Rubicon Project shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Rubicon Project 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. As at June 2019, Rubicon Project had cash of US$86m and no debt. Importantly, its cash burn was US$16m over the trailing twelve months. So it had a cash runway of about 5.3 years from June 2019. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. You can see how its cash balance has changed over time in the image below.
How Well Is Rubicon Project Growing?
Rubicon Project managed to reduce its cash burn by 67% over the last twelve months, which suggests it's on the right flight path. And it could also show revenue growth of 18% in the same period. It seems to be growing nicely. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Rubicon Project Raise More Cash Easily?
We are certainly impressed with the progress Rubicon Project has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to drive 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.
Rubicon Project has a market capitalisation of US$469m and burnt through US$16m last year, which is 3.5% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Rubicon Project's Cash Burn?
As you can probably tell by now, we're not too worried about Rubicon Project's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its revenue growth wasn't quite as good, but was still rather encouraging! Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Notably, our data indicates that Rubicon Project insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course Rubicon Project 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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If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.