In This Article:
Just because a business does not make any money, does not mean that the stock will go down. 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 Hoftex Group (MUN:NBH) 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Check out our latest analysis for Hoftex Group
How Long Is Hoftex Group's 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. In June 2024, Hoftex Group had €9.9m in cash, and was debt-free. Looking at the last year, the company burnt through €3.6m. That means it had a cash runway of about 2.8 years as of June 2024. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
Is Hoftex Group's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Hoftex Group 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 8.9%. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Hoftex Group is building its business over time.
How Hard Would It Be For Hoftex Group To Raise More Cash For Growth?
Given its problematic fall in revenue, Hoftex Group 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. 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).
Hoftex Group's cash burn of €3.6m is about 9.4% of its €38m 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.