We're Not Very Worried About Rocky Mountain Chocolate Factory's (NASDAQ:RMCF) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

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. 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.

Check out our latest analysis for Rocky Mountain Chocolate Factory

When Might Rocky Mountain Chocolate Factory Run Out Of Money?

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. In May 2023, Rocky Mountain Chocolate Factory had US$5.1m in cash, and was debt-free. In the last year, its cash burn was US$3.8m. So it had a cash runway of approximately 16 months from May 2023. 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. The image below shows how its cash balance has been changing over the last few years.

Is Rocky Mountain Chocolate Factory's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Rocky Mountain Chocolate Factory actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. While it's not that amazing, we still think that the 4.1% increase in revenue from operations was a positive. In reality, this article only makes a short study of the company's growth data. You can take a look at how Rocky Mountain Chocolate Factory has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Rocky Mountain Chocolate Factory Raise Cash?

While Rocky Mountain Chocolate Factory is showing solid revenue growth, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Rocky Mountain Chocolate Factory has a market capitalisation of US$36m and burnt through US$3.8m last year, which is 11% of the company's market value. 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.

How Risky Is Rocky Mountain Chocolate Factory's Cash Burn Situation?

The good news is that in our view Rocky Mountain Chocolate Factory's cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash runway, while on the other it can also boast very strong cash burn relative to its market cap. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking a deeper dive, we've spotted 2 warning signs for Rocky Mountain Chocolate Factory you should be aware of, and 1 of them is a bit unpleasant.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.