Is Rocky Mountain Chocolate Factory (NASDAQ:RMCF) In A Good 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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Rocky Mountain Chocolate Factory (NASDAQ:RMCF) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Rocky Mountain Chocolate Factory

When Might Rocky Mountain Chocolate Factory Run Out Of Money?

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. As at August 2023, Rocky Mountain Chocolate Factory had cash of US$4.0m and no debt. In the last year, its cash burn was US$3.2m. That means it had a cash runway of around 15 months as of August 2023. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

How Well Is Rocky Mountain Chocolate Factory Growing?

Notably, Rocky Mountain Chocolate Factory actually ramped up its cash burn very hard and fast in the last year, by 195%, signifying heavy investment in the business. While operating revenue was up over the same period, the 9.3% gain gives us scant comfort. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Rocky Mountain Chocolate Factory is building its business over time.

Can Rocky Mountain Chocolate Factory Raise More Cash Easily?

Given the trajectory of Rocky Mountain Chocolate Factory's cash burn, many investors will already be thinking about how it might raise more cash in the future. 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.

Rocky Mountain Chocolate Factory's cash burn of US$3.2m is about 10% of its US$31m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Rocky Mountain Chocolate Factory's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Rocky Mountain Chocolate Factory's cash burn relative to its market cap was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Rocky Mountain Chocolate Factory (1 is potentially serious!) that you should be aware of before investing here.

Of course Rocky Mountain Chocolate Factory 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.