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Just because a business does not make any money, does not mean that the stock will go down. By way of example, DAVIDsTEA (NASDAQ:DTEA) has seen its share price rise 317% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So notwithstanding the buoyant share price, we think it's well worth asking whether DAVIDsTEA's cash burn is too risky. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does DAVIDsTEA Have A Long Cash Runway?
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. As at May 2021, DAVIDsTEA had cash of CA$31m and no debt. Importantly, its cash burn was CA$6.2m over the trailing twelve months. So it had a cash runway of about 5.0 years from May 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.
Is DAVIDsTEA's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because DAVIDsTEA actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 39%. In reality, this article only makes a short study of the company's growth data. 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 Hard Would It Be For DAVIDsTEA To Raise More Cash For Growth?
Since its revenue growth is moving in the wrong direction, DAVIDsTEA shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
DAVIDsTEA's cash burn of CA$6.2m is about 5.2% of its CA$119m 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.
How Risky Is DAVIDsTEA's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way DAVIDsTEA is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its falling revenue is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Separately, we looked at different risks affecting the company and spotted 5 warning signs for DAVIDsTEA (of which 2 are significant!) you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
This article by Simply Wall St is general in nature. 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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