We're Keeping An Eye On Humble & Fume's (CSE:HMBL) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 Humble & Fume (CSE:HMBL) shareholders should 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.

Check out our latest analysis for Humble & Fume

Does Humble & Fume Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Humble & Fume last reported its balance sheet in March 2022, it had zero debt and cash worth CA$12m. In the last year, its cash burn was CA$9.2m. That means it had a cash runway of around 16 months as of March 2022. 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.

How Well Is Humble & Fume Growing?

One thing for shareholders to keep front in mind is that Humble & Fume increased its cash burn by 277% in the last twelve months. On top of that, the fact that operating revenue was basically flat over the same period compounds the concern. Considering these two factors together makes us nervous about the direction the company seems to be heading. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Humble & Fume is building its business over time.

How Easily Can Humble & Fume Raise Cash?

Given the trajectory of Humble & Fume's cash burn, many investors will already be thinking about how it might raise more cash in the future. 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 CA$27m, Humble & Fume's CA$9.2m in cash burn equates to about 35% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

How Risky Is Humble & Fume's Cash Burn Situation?

On this analysis of Humble & Fume's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Summing up, we think the Humble & Fume's cash burn is a risk, based on the factors we mentioned in this article. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Humble & Fume that potential shareholders should take into account before putting money into a stock.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.