We're A Little Worried About Rent.com.au's (ASX:RNT) Cash Burn Rate
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Rent.com.au (ASX:RNT) 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.
See our latest analysis for Rent.com.au
How Long Is Rent.com.au's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Rent.com.au last reported its balance sheet in June 2019, it had zero debt and cash worth AU$152k. Importantly, its cash burn was AU$2.5m over the trailing twelve months. Therefore, from June 2019 it seems to us it had less than two months of cash runway. It's extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.
How Well Is Rent.com.au Growing?
It was fairly positive to see that Rent.com.au reduced its cash burn by 30% during the last year. Unfortunately, however, operating revenue declined by 6.9% during the period. On balance, we'd say the company is improving over time. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Rent.com.au has developed its business over time by checking this visualization of its revenue and earnings history.
Can Rent.com.au Raise More Cash Easily?
Given Rent.com.au's revenue is receding, there's a considerable chance it will eventually need to raise more money to spend on driving growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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).
Rent.com.au has a market capitalisation of AU$9.6m and burnt through AU$2.5m last year, which is 26% of the company's 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 Rent.com.au's Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Rent.com.au's cash burn reduction was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Notably, our data indicates that Rent.com.au insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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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. Thank you for reading.
