As the kr691m market cap Hövding Sverige AB (publ) (STO:HOVD) released another year of negative earnings, investors may be on edge waiting for breakeven. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? Selling new shares may dilute the value of existing shares on issue, and since Hövding Sverige is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Hövding Sverige may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
What is cash burn?
With a negative free cash flow of -kr38.8m, Hövding Sverige is chipping away at its kr38m cash reserves in order to run its business. The riskiest factor facing investors of Hövding Sverige is the potential for the company to run out of cash without the ability to raise more money. Hövding Sverige operates in the leisure products industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Hövding Sverige faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.
When will Hövding Sverige need to raise more cash?
One way to measure the cost to Hövding Sverige of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
Free cash outflows grew by 7.0% over the past year, which is relatively reasonable for a small-cap company. But, if Hövding Sverige continues to ramp up its cash burn at this rate, given how much money it currently has in the bank, it will actually need to raise capital again within the next year. This is also the case if Hövding Sverige maintains its cash burn level of -kr38.8m, without growth, going forward. Although this is a relatively simplistic calculation, and Hövding Sverige could reduce its costs or borrow money instead of raising new equity capital, this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
Loss-making companies are a risky play, especially those that are still ramping up its cash burn. Though, this shouldn’t discourage you from considering entering the stock in the future. Now you know that if the company was to continue to grow its cash burn at this rate, it will not be able to sustain its operations given the current level of cash reserves. An opportunity may exist for you to enter into the stock at a more attractive price, should Hövding Sverige raise equity to fund its operations. Keep in mind I haven't considered other factors such as how HOVD is expected to perform in the future. I recommend you continue to research Hövding Sverige to get a better picture of the company by looking at:
- Historical Performance: What has HOVD's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Hövding Sverige’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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