There is no doubt that it is possible to make money by owning shares of unprofitable companies. For example, although Amazon.com posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. But while history boasts of these rare successes, those who fail are often forgotten; who remembers Pets.com?
So the natural question for Xcel Brands (NASDAQ: XELB) shareholders is whether they should worry about its cash burn rate. For the purposes of this article, we will define cash burn as the amount of money the business spends each year to finance its growth (also known as negative free cash flow). We will start by comparing its cash consumption with its cash reserves in order to calculate its cash trail.
How long is the Xcel Brands cash trail?
You can calculate a company’s cash trail by dividing the amount of cash it has on hand by the rate at which it spends that money. As of June 2022, Xcel Brands had $11 million in cash and no debt. Looking at last year, the company burned 12 million US dollars. Therefore, as of June 2022, he had approximately 11 months of cash. Importantly, the one analyst we see covering the stock thinks Xcel Brands will break even in about 21 months. Essentially, this means the business will reduce its cash burn or need more cash. The image below shows how his cash balance has changed over the past few years.
How far is Xcel Brands growing?
Xcel Brands has boosted investment significantly over the past year, with cash burn up 61%. This gives us pause, and we cannot take comfort in the 9.4% operating revenue growth over the same period. Given these two factors, we’re not particularly excited about its growth profile. While the past is always worth studying, it is the future that matters most. So you might want to take a look at how much the business is expected to grow in the next few years.
Can Xcel brands raise more money easily?
Given Xcel Brands’ cash burn trajectory, many investors will already be thinking about how it might raise more cash in the future. Issuing new shares or going into debt are the most common ways for a listed company to raise more funds for its business. Many companies end up issuing new shares to fund their future growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the company running for another year (at the same burn rate).
Xcel Brands’ cash burn of US$12 million represents approximately 59% of its market capitalization of US$20 million. These are high expenses relative to the value of the entire company, so if it has to issue stock to fund further growth, it could end up hurting shareholder returns significantly (through significant dilution).
Is Xcel Brands’ cash burn a concern?
On this analysis of Xcel Brands’ cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market capitalization has us a bit concerned. It is clearly very positive to see that at least one analyst predicts that the company will soon break even. We don’t think its cash burn is particularly problematic, but after considering the range of factors discussed in this article, we think shareholders should monitor its evolution over time. Readers should have a good understanding of business risks before investing in a stock, and we have spotted 2 warning signs for Xcel brands potential shareholders should consider before investing in a stock.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of companies that insiders buy, and this list of growth stocks (according to analyst forecasts)
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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