Nasdaq Today – Will Freshpet (NASDAQ:FRPT) Spend Its Cash Wisely?
There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Freshpet (NASDAQ:FRPT) shareholders is whether they should be concerned by its rate of cash burn. 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. Let’s start with an examination of the business’ cash, relative to its cash burn.
Check out our latest analysis for Freshpet
Does Freshpet Have A Long Cash Runway?
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2020, Freshpet had cash of US$67m and no debt. In the last year, its cash burn was US$113m. So it had a cash runway of approximately 7 months from December 2020. Importantly, analysts think that Freshpet will reach cashflow breakeven in 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.
How Well Is Freshpet Growing?
Notably, Freshpet actually ramped up its cash burn very hard and fast in the last year, by 108%, signifying heavy investment in the business. On the bright side, at least operating revenue was up 30% over the same period, giving some cause for hope. Considering both these factors, we’re not particularly excited by its growth profile. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For Freshpet To Raise More Cash For Growth?
Given the trajectory of Freshpet’s cash burn, many investors will already be thinking about how it might raise more cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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).
Freshpet has a market capitalisation of US$6.0b and burnt through US$113m last year, which is 1.9% of the company’s market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is Freshpet’s Cash Burn A Worry?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Freshpet’s cash burn relative to its market cap was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. Even though we don’t think it has a problem with its cash burn, the analysis we’ve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Freshpet (1 can’t be ignored!) that you should be aware of before investing here.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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