We Think Brøndbyernes IF Fodbold (CPH:BIF) Needs To Drive Business Growth Carefully

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Brøndbyernes IF Fodbold (CPH:BIF) shareholders is whether they should be concerned by its rate of 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.

See our latest analysis for Brøndbyernes IF Fodbold

How Long Is Brøndbyernes IF Fodbold's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Brøndbyernes IF Fodbold has such a small amount of debt that we'll set it aside, and focus on the kr.27m in cash it held at June 2020. Looking at the last year, the company burnt through kr.36m. So it had a cash runway of approximately 9 months from June 2020. 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. The image below shows how its cash balance has been changing over the last few years.

How Well Is Brøndbyernes IF Fodbold Growing?

We reckon the fact that Brøndbyernes IF Fodbold managed to shrink its cash burn by 35% over the last year is rather encouraging. Unfortunately, however, operating revenue declined by 19% during the period. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how Brøndbyernes IF Fodbold has developed its business over time by checking this visualization of its revenue and earnings history.

Can Brøndbyernes IF Fodbold Raise More Cash Easily?

Given Brøndbyernes IF Fodbold's revenue is receding, there's a considerable chance it will eventually need to raise more money to spend on driving growth. Companies can raise capital through either debt or equity. 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 kr.233m, Brøndbyernes IF Fodbold's kr.36m in cash burn equates to about 15% 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.

So, Should We Worry About Brøndbyernes IF Fodbold's Cash Burn?

On this analysis of Brøndbyernes IF Fodbold's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, Brøndbyernes IF Fodbold has 4 warning signs (and 3 which are a bit concerning) we think you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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This article by Simply Wall St is general in nature. 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.
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