Companies Like ChromaDex (NASDAQ:CDXC) Can Afford To Invest In Growth

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for ChromaDex (NASDAQ:CDXC) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for ChromaDex

Does ChromaDex Have A Long 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. When ChromaDex last reported its balance sheet in September 2021, it had zero debt and cash worth US$33m. In the last year, its cash burn was US$20m. That means it had a cash runway of around 20 months as of September 2021. Importantly, though, analysts think that ChromaDex will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.

How Well Is ChromaDex Growing?

ChromaDex actually ramped up its cash burn by a whopping 68% in the last year, which shows it is boosting investment in the business. That does give us pause, and we can't take much solace in the operating revenue growth of 14% in the same time frame. Considering both these factors, we're not particularly excited by its growth profile. 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.

Can ChromaDex Raise More Cash Easily?

While ChromaDex seems to be in a fairly good position, 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. 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.

ChromaDex's cash burn of US$20m is about 5.2% of its US$375m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is ChromaDex's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way ChromaDex is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Taking an in-depth view of risks, we've identified 2 warning signs for ChromaDex that you should be aware of before investing.

Of course ChromaDex 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.

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.

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