Here’s Why We’re Not Too Worried About Nearmap’s (ASX:NEA) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Nearmap (ASX:NEA) shareholders is whether they should be concerned by its rate of 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’.

Does Nearmap Have A Long Cash Runway?

A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Nearmap last reported its balance sheet in December 2019, it had zero debt and cash worth AU$50m. In the last year, its cash burn was AU$33m. That means it had a cash runway of around 18 months as of December 2019. Importantly, analysts think that Nearmap will reach cashflow breakeven in 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.

ASX:NEA Historical Debt, March 10th 2020

How Well Is Nearmap Growing?

It was quite stunning to see that Nearmap increased its cash burn by 228% over the last year. On the bright side, at least operating revenue was up 37% over the same period, giving some cause for hope. Taken together, we think these growth metrics are a little worrying. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

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

Nearmap 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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 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.

Since it has a market capitalisation of AU$688m, Nearmap’s AU$33m in cash burn equates to about 4.8% of its 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.

Is Nearmap’s Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Nearmap’s cash burn relative to its market cap was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. 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. Its important for readers to be cognizant of the risks that can affect the company’s operations, and we’ve picked out 2 warning signs for Nearmap that investors should know when investing in the stock.

 

 

Source: Simplywall