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Can eve Sleep (LON:EVE) Afford To Invest In Growth?

Simply Wall St

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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So should eve Sleep (LON:EVE) shareholders be worried about its 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. 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 eve Sleep

When Might eve Sleep Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2019, eve Sleep had UK£13m in cash, and was debt-free. Looking at the last year, the company burnt through UK£17m. That means it had a cash runway of around 9 months as of June 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Depicted below, you can see how its cash holdings have changed over time.

AIM:EVE Historical Debt, December 22nd 2019

How Well Is eve Sleep Growing?

On balance, we think it's mildly positive that eve Sleep trimmed its cash burn by 16% over the last twelve months. Unfortunately, however, operating revenue declined by 17% during the period. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how eve Sleep is building its business over time.

Can eve Sleep Raise More Cash Easily?

Since eve Sleep revenue has been falling, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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).

eve Sleep's cash burn of UK£17m is about 304% of its UK£5.5m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

How Risky Is eve Sleep's Cash Burn Situation?

On this analysis of eve Sleep's cash burn, we think its cash burn reduction was reassuring, while its cash burn relative to its market cap has us a bit worried. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the eve Sleep CEO is paid..

Of course eve Sleep may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.