Companies Like Hotel Chocolat Group (LON:HOTC) Are In A Position To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Hotel Chocolat Group (LON:HOTC) shareholders be worried about its 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Hotel Chocolat Group

How Long Is Hotel Chocolat Group's 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. When Hotel Chocolat Group last reported its balance sheet in June 2022, it had zero debt and cash worth UK£18m. In the last year, its cash burn was UK£16m. So it had a cash runway of approximately 13 months from June 2022. Importantly, analysts think that Hotel Chocolat Group will reach cashflow breakeven in around 14 months. That means it doesn't have a great deal of breathing room, but it shouldn't really need more cash, considering that cash burn should be continually reducing. You can see how its cash balance has changed over time in the image below.

How Well Is Hotel Chocolat Group Growing?

One thing for shareholders to keep front in mind is that Hotel Chocolat Group increased its cash burn by 240% in the last twelve months. But the silver lining is that operating revenue increased by 37% in that time. Considering both these metrics, we're a little concerned about how the company is developing. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Hotel Chocolat Group Raise More Cash Easily?

Given the trajectory of Hotel Chocolat Group's cash burn, many investors will already be thinking about how it might raise more cash in the future. Companies can raise capital through either debt or equity. 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.

Hotel Chocolat Group's cash burn of UK£16m is about 7.7% of its UK£213m market capitalisation. 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.

Is Hotel Chocolat Group's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Hotel Chocolat Group is burning through its cash. For example, we think its revenue growth 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. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. 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. Notably, our data indicates that Hotel Chocolat Group insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

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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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.