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We're Hopeful That Purplebricks Group (LON:PURP) Will Use Its Cash Wisely

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·4 min read
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  • PRPPF

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Purplebricks Group (LON:PURP) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Purplebricks Group

How Long Is Purplebricks Group's 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. As at October 2019, Purplebricks Group had cash of UK£42m and no debt. Importantly, its cash burn was UK£47m over the trailing twelve months. Therefore, from October 2019 it had roughly 11 months of cash runway. Notably, analysts forecast that Purplebricks Group will break even (at a free cash flow level) in about 18 months. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
debt-equity-history-analysis

How Well Is Purplebricks Group Growing?

At first glance it's a bit worrying to see that Purplebricks Group actually boosted its cash burn by 30%, year on year. The silver lining is that revenue was up 36%, showing the business is growing at the top line. On balance, we'd say the company is improving over time. 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.

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

Purplebricks Group seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).

Since it has a market capitalisation of UK£153m, Purplebricks Group's UK£47m in cash burn equates to about 31% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About Purplebricks Group's Cash Burn?

On this analysis of Purplebricks Group's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Purplebricks Group that potential shareholders should take into account before putting money into a stock.

Of course Purplebricks Group 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.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.