DAVIDsTEA (NASDAQ:DTEA) Is In A Good Position To Deliver On Growth Plans

Just because a business does not make any money, does not mean that the stock will go down. For example, DAVIDsTEA (NASDAQ:DTEA) shareholders have done very well over the last year, with the share price soaring by 364%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for DAVIDsTEA shareholders to consider whether its cash burn is concerning. 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.

Check out our latest analysis for DAVIDsTEA

How Long Is DAVIDsTEA'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. When DAVIDsTEA last reported its balance sheet in May 2021, it had zero debt and cash worth CA$31m. In the last year, its cash burn was CA$6.2m. That means it had a cash runway of about 5.0 years as of May 2021. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

Is DAVIDsTEA's Revenue Growing?

Given that DAVIDsTEA actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Unfortunately, the last year has been a disappointment, with operating revenue dropping 39% during the period. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how DAVIDsTEA has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can DAVIDsTEA Raise Cash?

Given its problematic fall in revenue, DAVIDsTEA shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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. 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.

DAVIDsTEA has a market capitalisation of CA$133m and burnt through CA$6.2m last year, which is 4.7% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is DAVIDsTEA's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way DAVIDsTEA is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although we do find its falling revenue 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. 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 a deeper dive, we've spotted 4 warning signs for DAVIDsTEA you should be aware of, and 2 of them are a bit unpleasant.

Of course DAVIDsTEA 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.

When trading DAVIDsTEA or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.