Companies Like Enjoei (BVMF:ENJU3) Are In A Position To Invest In Growth

By
Simply Wall St
Published
November 16, 2021
BOVESPA:ENJU3
Source: Shutterstock

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?

Given this risk, we thought we'd take a look at whether Enjoei (BVMF:ENJU3) shareholders should 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'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Enjoei

When Might Enjoei Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Enjoei last reported its balance sheet in June 2021, it had zero debt and cash worth R$434m. Importantly, its cash burn was R$69m over the trailing twelve months. That means it had a cash runway of about 6.3 years as of June 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
BOVESPA:ENJU3 Debt to Equity History November 17th 2021

How Well Is Enjoei Growing?

It was quite stunning to see that Enjoei increased its cash burn by 1,582% over the last year. While that isa little concerning at a glance, the company has a track record of recent growth, evidenced by the impressive 70% growth in revenue, over the very same year. In light of the data above, we're fairly sanguine about the business growth trajectory. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Enjoei Raise More Cash Easily?

While Enjoei 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. 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. 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.

Since it has a market capitalisation of R$787m, Enjoei's R$69m in cash burn equates to about 8.7% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Enjoei's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Enjoei is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Enjoei that potential shareholders should take into account before putting money into a stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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