Yahoo Finance We Think On the Beach Group (LON:OTB) Can Easily Afford To Drive Business Growth
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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, the natural question for On the Beach Group (LON:OTB) shareholders is whether they should be concerned by its rate of 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). Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for On the Beach Group
How Long Is On the Beach Group's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When On the Beach Group last reported its balance sheet in September 2021, it had zero debt and cash worth UK£56m. Looking at the last year, the company burnt through UK£3.9m. That means it had a cash runway of very many years as of September 2021. Depicted below, you can see how its cash holdings have changed over time.
How Well Is On the Beach Group Growing?
On the Beach Group managed to reduce its cash burn by 95% over the last twelve months, which is extremely promising, when it comes to considering its need for cash. But it was a bit disconcerting to see operating revenue down 37% in that time. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can On the Beach Group Raise Cash?
While On the Beach Group seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and 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.
On the Beach Group's cash burn of UK£3.9m is about 0.8% of its UK£490m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
So, Should We Worry About On the Beach Group's Cash Burn?
As you can probably tell by now, we're not too worried about On the Beach Group's cash burn. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. While we must concede that its falling revenue is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for On the Beach Group that investors should know when investing in the stock.
Of course On the Beach 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
