Companies Like Hövding Sverige (STO:HOVD) Are In A Position To Invest In Growth

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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So should Hövding Sverige (STO:HOVD) 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. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Hövding Sverige

Does Hövding Sverige Have A Long Cash Runway?

A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2019, Hövding Sverige had cash of kr38m and no debt. In the last year, its cash burn was kr39m. So it had a cash runway of approximately 12 months from June 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Depicted below, you can see how its cash holdings have changed over time.

OM:HOVD Historical Debt, October 21st 2019
OM:HOVD Historical Debt, October 21st 2019

How Well Is Hövding Sverige Growing?

Some investors might find it troubling that Hövding Sverige is actually increasing its cash burn, which is up 18% in the last year. But looking on the bright side, its revenue gained by 54%, lending some credence to the growth narrative. The company needs to keep up that growth, if it is to really please shareholders. We think it is growing rather well, upon reflection. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. You can take a look at how Hövding Sverige is growing revenue over time by checking this visualization of past revenue growth.

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

Hövding Sverige 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. 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).

Since it has a market capitalisation of kr656m, Hövding Sverige’s kr39m in cash burn equates to about 5.9% 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 Hövding Sverige’s Cash Burn A Worry?

On this analysis of Hövding Sverige’s cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. While we’re the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Hövding Sverige’s situation. We think it’s very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Hövding Sverige’s CEO gets paid each year.

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)

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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.