When Will Loss-Maker Hövding Sverige AB (publ) (STO:HOVD) Need More Cash?

As the KR159.68M market cap Hövding Sverige AB (publ) (OM:HOVD) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Additional cash raising may dilute the value of your shares, and since Hövding Sverige is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Hövding Sverige’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. See our latest analysis for Hövding Sverige

What is cash burn?

Hövding Sverige’s expenses are currently higher than the money it makes from its day-to-day operations, which means it is funding its overhead with equity capital a.k.a. its cash. With a negative operating cash flow of -KR44.12M, Hövding Sverige is chipping away at its KR12.72M cash reserves in order to run its business. How fast Hövding Sverige runs down its cash supply over time is known as the cash burn rate. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Hövding Sverige operates in the leisure products industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Hövding Sverige faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.

OM:HOVD Income Statement May 24th 18
OM:HOVD Income Statement May 24th 18

When will Hövding Sverige need to raise more cash?

Hövding Sverige has to pay its employees and other necessities such as rent and admin costs in order to keep its business running. These costs are called operational expenses, which is sometimes shortened to opex. In this calculation I’ve only included recurring sales, general and admin (SG&A) expenses, and R&D expenses occured within they year. In the past year, opex (excluding one-offs) rose by 15.38%, which is considerably high. Not surprisingly, if Hövding Sverige continues to ramp up expenditure at this rate for the upcoming year, it’ll likely need to come to market within the next few months, given the its current level of cash reserves. Furthermore, even if Hövding Sverige kept its opex level at the current KR54.02M, it will still be coming to market in the next couple of months. Even though this is analysis is fairly basic, and Hövding Sverige still can cut its overhead in the near future, or raise debt capital instead of coming to equity markets, the outcome of this analysis still helps us understand how sustainable the Hövding Sverige’s operation is, and when things may have to change.

Next Steps:

This analysis isn’t meant to deter you from Hövding Sverige, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its high opex growth and its level of cash reserves. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next. This is only a rough assessment of financial health, and I’m sure HOVD has company-specific issues impacting its cash management decisions. I suggest you continue to research Hövding Sverige to get a more holistic view of the company by looking at:
  1. Historical Performance: What has HOVD’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Hövding Sverige’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 March 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.