Companies Like Hotel Chocolat Group (LON:HOTC) Can Afford 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Hotel Chocolat Group (LON:HOTC) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Hotel Chocolat Group

How Long Is Hotel Chocolat Group's Cash Runway?

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 December 2022, Hotel Chocolat Group had cash of UK£28m and no debt. Importantly, its cash burn was UK£7.7m over the trailing twelve months. Therefore, from December 2022 it had 3.7 years of cash runway. Importantly, though, analysts think that Hotel Chocolat Group will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Hotel Chocolat Group Growing?

Happily, Hotel Chocolat Group is travelling in the right direction when it comes to its cash burn, which is down 56% over the last year. And it could also show revenue growth of 3.6% in the same period. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Hotel Chocolat Group Raise Cash?

We are certainly impressed with the progress Hotel Chocolat Group has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of UK£157m, Hotel Chocolat Group's UK£7.7m in cash burn equates to about 4.9% of its market value. 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 cash runway suggests that the company is on a good path. Its weak point is its revenue growth, but even that wasn't too bad! 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. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Hotel Chocolat Group CEO receives in total remuneration.

Of course Hotel Chocolat Group 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.