Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we’d take a look at whether Mackmyra Svensk Whisky (STO:MACK B) shareholders should 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. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Mackmyra Svensk Whisky’s Cash Runway?
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In June 2019, Mackmyra Svensk Whisky had kr876k in cash, and was debt-free. Importantly, its cash burn was kr12m over the trailing twelve months. Therefore, from June 2019 it seems to us it had less than two months of cash runway. It’s extremely surprising to us that the company has allowed its cash runway to get that short! The image below shows how its cash balance has been changing over the last few years.
How Well Is Mackmyra Svensk Whisky Growing?
On balance, we think it’s mildly positive that Mackmyra Svensk Whisky trimmed its cash burn by 16% over the last twelve months. Revenue also improved during the period, increasing by 2.9%. Considering the factors above, the company seems have some good growth. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. You can take a look at how Mackmyra Svensk Whisky has developed its business over time by checking this visualization of its revenue and earnings history.
Can Mackmyra Svensk Whisky Raise More Cash Easily?
Given Mackmyra Svensk Whisky’s revenue is receding, there’s a considerable chance it will eventually need to raise more money to spend on driving growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to 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.
Mackmyra Svensk Whisky has a market capitalisation of kr109m and burnt through kr12m last year, which is 11% of the company’s market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but there’s a good chance shareholders would be somewhat diluted.
So, Should We Worry About Mackmyra Svensk Whisky’s Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Mackmyra Svensk Whisky’s cash burn relative to its market cap was truly promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Mackmyra Svensk Whisky CEO is paid..Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.