We're Keeping An Eye On Kaival Brands Innovations Group's (NASDAQ:KAVL) 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Kaival Brands Innovations Group (NASDAQ:KAVL) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Kaival Brands Innovations Group

How Long Is Kaival Brands Innovations Group'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. In January 2022, Kaival Brands Innovations Group had US$5.6m in cash, and was debt-free. Looking at the last year, the company burnt through US$6.0m. Therefore, from January 2022 it had roughly 11 months of cash runway. Importantly, the one analyst we see covering the stock thinks that Kaival Brands Innovations Group will reach cashflow breakeven in around 20 months. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.

Is Kaival Brands Innovations Group's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Kaival Brands Innovations Group actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. The harsh truth is that operating revenue dropped 76% in the last year, which is quite problematic for a cash burning company. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Kaival Brands Innovations Group To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, Kaival Brands Innovations Group shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Kaival Brands Innovations Group has a market capitalisation of US$28m and burnt through US$6.0m last year, which is 22% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

So, Should We Worry About Kaival Brands Innovations Group's Cash Burn?

We must admit that we don't think Kaival Brands Innovations Group is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its cash burn relative to its market cap acceptable, we can't ignore the fact that we consider its falling revenue to be downright troublesome. It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Kaival Brands Innovations Group (1 is potentially serious!) that you should be aware of before investing here.

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.