We can readily understand why investors are attracted to unprofitable companies. 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 Hövding Sverige (STO:HOVD) 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is Hövding Sverige's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Hövding Sverige last reported its balance sheet in September 2020, it had zero debt and cash worth kr66m. Importantly, its cash burn was kr42m over the trailing twelve months. That means it had a cash runway of around 19 months as of September 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.
How Well Is Hövding Sverige Growing?
We reckon the fact that Hövding Sverige managed to shrink its cash burn by 27% over the last year is rather encouraging. Having said that, the revenue growth of 53% was considerably more inspiring. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Hövding Sverige is growing revenue over time by checking this visualization of past revenue growth.
How Hard Would It Be For Hövding Sverige To Raise More Cash For Growth?
While Hövding Sverige 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. 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 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).
Hövding Sverige has a market capitalisation of kr674m and burnt through kr42m last year, which is 6.3% of the company's 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 Hövding Sverige's Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Hövding Sverige's cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. And even though its cash runway wasn't quite as impressive, it was still a positive. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking a deeper dive, we've spotted 3 warning signs for Hövding Sverige you should be aware of, and 1 of them doesn't sit too well with us.
Of course Hövding Sverige 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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