Stock Analysis

We Think Else Nutrition Holdings (CVE:BABY) Can Afford To Drive Business Growth

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TSX:BABY
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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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Else Nutrition Holdings (CVE:BABY) shareholders 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Else Nutrition Holdings

Does Else Nutrition Holdings 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, Else Nutrition Holdings had CA$21m in cash, and was debt-free. In the last year, its cash burn was CA$13m. Therefore, from March 2021 it had roughly 20 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

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TSXV:BABY Debt to Equity History July 13th 2021

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

Whilst it's great to see that Else Nutrition Holdings has already begun generating revenue from operations, last year it only produced CA$2.3m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. In fact, it ramped its spending strongly over the last year, increasing cash burn by 197%. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. 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 Else Nutrition Holdings Raise More Cash Easily?

Given its cash burn trajectory, Else Nutrition Holdings shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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 CA$284m, Else Nutrition Holdings' CA$13m in cash burn equates to about 4.5% 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.

So, Should We Worry About Else Nutrition Holdings' Cash Burn?

On this analysis of Else Nutrition Holdings' cash burn, we think its cash burn relative to its market cap 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 Else Nutrition Holdings' situation. Taking an in-depth view of risks, we've identified 3 warning signs for Else Nutrition Holdings that you should be aware of before investing.

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)

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