We're Not Very Worried About Enjoei's (BVMF:ENJU3) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Enjoei (BVMF:ENJU3) shareholders be worried about its 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.

See our latest analysis for Enjoei

Does Enjoei Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In March 2021, Enjoei had R$474m in cash, and was debt-free. Looking at the last year, the company burnt through R$26m. So it had a very long cash runway of many years from March 2021. Notably, however, analysts think that Enjoei will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

How Well Is Enjoei Growing?

Notably, Enjoei actually ramped up its cash burn very hard and fast in the last year, by 195%, signifying heavy investment in the business. While that certainly gives us pause for thought, we take a lot of comfort in the strong annual revenue growth of 52%. 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. 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 Enjoei To Raise More Cash For Growth?

We are certainly impressed with the progress Enjoei has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. 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$1.7b, Enjoei's R$26m in cash burn equates to about 1.5% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Enjoei's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Enjoei is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. One real positive is that analysts are forecasting that the company will reach breakeven. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. 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 Enjoei that investors should know when investing in the 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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