Here's Why We're Watching ABOUT YOU Holding's (FRA:YOU) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for ABOUT YOU Holding (FRA:YOU) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for ABOUT YOU Holding

How Long Is ABOUT YOU Holding's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When ABOUT YOU Holding last reported its balance sheet in August 2022, it had zero debt and cash worth €348m. In the last year, its cash burn was €254m. That means it had a cash runway of around 16 months as of August 2022. Importantly, analysts think that ABOUT YOU Holding will reach cashflow breakeven in 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is ABOUT YOU Holding Growing?

One thing for shareholders to keep front in mind is that ABOUT YOU Holding increased its cash burn by 441% in the last twelve months. But the silver lining is that operating revenue increased by 26% in that time. Considering both these metrics, we're a little concerned about how the company is developing. 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.

How Hard Would It Be For ABOUT YOU Holding To Raise More Cash For Growth?

Given the trajectory of ABOUT YOU Holding'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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

ABOUT YOU Holding's cash burn of €254m is about 25% of its €1.0b market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About ABOUT YOU Holding's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought ABOUT YOU Holding's revenue growth was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Summing up, we think the ABOUT YOU Holding's cash burn is a risk, based on the factors we mentioned in this article. Taking an in-depth view of risks, we've identified 1 warning sign for ABOUT YOU Holding that you should be aware of before investing.

Of course ABOUT YOU Holding 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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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.