Stock Analysis

Here's Why We're Not At All Concerned With Zevia PBC's (NYSE:ZVIA) Cash Burn Situation

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NYSE:ZVIA
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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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Zevia PBC (NYSE:ZVIA) 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

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When Might Zevia PBC Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In September 2021, Zevia PBC had US$79m in cash, and was debt-free. Looking at the last year, the company burnt through US$17m. That means it had a cash runway of about 4.8 years as of September 2021. Notably, however, analysts think that Zevia PBC will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
NYSE:ZVIA Debt to Equity History February 24th 2022

How Well Is Zevia PBC Growing?

Notably, Zevia PBC actually ramped up its cash burn very hard and fast in the last year, by 141%, signifying heavy investment in the business. That does give us pause, and we can't take much solace in the operating revenue growth of 20% in the same time frame. Considering both these metrics, we're a little concerned about how the company is developing. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Zevia PBC Raise Cash?

Zevia PBC seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Zevia PBC has a market capitalisation of US$565m and burnt through US$17m last year, which is 2.9% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Zevia PBC's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Zevia PBC's cash burn. For example, we think its cash runway suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. An in-depth examination of risks revealed 1 warning sign for Zevia PBC that readers should think about before committing capital to this stock.

Of course Zevia PBC 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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