Will Else Nutrition Holdings (TSE:BABY) Spend Its Cash Wisely?

By
Simply Wall St
Published
January 28, 2022
TSX:BABY
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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Else Nutrition Holdings (TSE:BABY) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Else Nutrition Holdings

When Might Else Nutrition Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Else Nutrition Holdings last reported its balance sheet in September 2021, it had zero debt and cash worth CA$13m. Looking at the last year, the company burnt through CA$16m. That means it had a cash runway of around 9 months as of September 2021. 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. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
TSX:BABY Debt to Equity History January 28th 2022

How Is Else Nutrition Holdings' Cash Burn Changing Over Time?

In our view, Else Nutrition Holdings doesn't yet produce significant amounts of operating revenue, since it reported just CA$4.0m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. In fact, it ramped its spending strongly over the last year, increasing cash burn by 160%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. 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.

Can Else Nutrition Holdings Raise More Cash Easily?

Since its cash burn is moving in the wrong direction, Else Nutrition Holdings shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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 CA$139m, Else Nutrition Holdings' CA$16m in cash burn equates to about 12% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Else Nutrition Holdings' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Else Nutrition Holdings' cash burn relative to its market cap was relatively promising. Summing up, we think the Else Nutrition Holdings' cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Else Nutrition Holdings (of which 1 is significant!) you should know about.

Of course Else Nutrition Holdings 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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