We Think ABOUT YOU Holding (FRA:YOU) Can Afford To Drive Business Growth

By
Simply Wall St
Published
February 21, 2022
DB:YOU
Source: Shutterstock

Just because a business does not make any money, does not mean that the stock will go down. 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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether ABOUT YOU Holding (FRA:YOU) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for ABOUT YOU Holding

When Might ABOUT YOU Holding Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at November 2021, ABOUT YOU Holding had cash of €583m and no debt. Looking at the last year, the company burnt through €92m. So it had a cash runway of about 6.3 years from November 2021. Notably, however, analysts think that ABOUT YOU Holding 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. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
DB:YOU Debt to Equity History February 21st 2022

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 202% in the last twelve months. But the silver lining is that operating revenue increased by 40% in that time. Considering both these factors, we're not particularly excited by its growth profile. 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 ABOUT YOU Holding Raise More Cash Easily?

While ABOUT YOU Holding seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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).

ABOUT YOU Holding has a market capitalisation of €2.3b and burnt through €92m last year, which is 4.0% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is ABOUT YOU Holding's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way ABOUT YOU Holding is burning through its cash. For example, we think its cash runway 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. Shareholders can take heart from the fact that analysts are forecasting it 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. An in-depth examination of risks revealed 1 warning sign for ABOUT YOU Holding that readers should think about before committing capital to this stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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