Yahoo Finance Here's Why We're A Bit Worried About MySale Group's (LON:MYSL) Cash Burn Situation
Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should MySale Group (LON:MYSL) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for MySale Group
How Long Is MySale Group's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2019, MySale Group had cash of AU$7.3m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through AU$18m. Therefore, from December 2019 it had roughly 5 months of cash runway. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. You can see how its cash balance has changed over time in the image below.
How Well Is MySale Group Growing?
Notably, MySale Group actually ramped up its cash burn very hard and fast in the last year, by 140%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 42%, making us very wary indeed. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how MySale Group is building its business over time.
Can MySale Group Raise More Cash Easily?
Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily MySale Group could raise cash. 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 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.
MySale Group has a market capitalisation of AU$30m and burnt through AU$18m last year, which is 59% of the company's market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.
So, Should We Worry About MySale Group's Cash Burn?
As you can probably tell by now, we're rather concerned about MySale Group's cash burn. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash runway, its falling revenue is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. Separately, we looked at different risks affecting the company and spotted 6 warning signs for MySale Group (of which 3 are a bit concerning!) you should know about.
Of course MySale 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.
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