Just because a company isn’t making money doesn’t mean the stock will go down. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. But while history boasts of these rare successes, those who fail are often forgotten; who remembers Pets.com?
So the natural question for 22nd Century Band (NASDAQ:XXII) shareholders is whether they should be concerned about its cash burn rate. For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. The first step is to compare its cash consumption with its cash reserves, to give us its “cash trail”.
See our latest analysis for 22nd Century Group
How long is the 22nd Century Group 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. When 22nd Century Group last published its balance sheet in March 2022, it had no debt and cash worth $39 million. Last year, its cash burn was $28 million. So it had a cash trail of about 16 months from March 2022. Not too bad, but it’s fair to say that the end of the cash trail is in sight unless the consumption of cash does drastically decrease. You can see how his cash balance has changed over time in the image below.
How far is 22nd Century Group growing?
22nd Century Group has actually increased its cash burn by 83% over the past year, showing that it is driving investment in the business. It gives us pause, and we can’t take comfort from the 19% operating revenue growth over the same period. In light of the above data, we are quite optimistic about the company’s growth trajectory. Obviously, however, the crucial factor is whether the company will expand its business in the future. You might want to take a look at the company’s expected growth over the next few years.
Can 22nd Century Group raise more money easily?
While 22nd Century Group appears to be in a pretty good position, it’s still worth considering how easily it could raise more cash, if only to fuel faster growth. Issuing new shares or going into debt are the most common ways for a listed company to raise more funds for its business. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
22nd Century Group has a market capitalization of $290 million and spent $28 million last year, or 9.7% of the company’s market value. This is a small proportion, so we think the company would be able to raise more cash to fund growth, with a bit of dilution, or even just borrow money.
Is 22nd Century Group’s cash burn a concern?
Even though its growing cash burn makes us a bit nervous, we are bound to mention that we think 22nd Century Group’s cash burn relative to its market capitalization is relatively promising. Cash-burning businesses are always on the riskier side of things, but after considering all the factors discussed in this short article, we’re not too worried about its cash burn rate. Readers should have a good understanding of business risks before investing in a stock, and we have spotted 3 warning signs for 22nd Century Group potential shareholders should consider before investing in a stock.
Sure 22nd Century Group may not be the best stock to buy. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.
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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.