Canada markets closed
  • S&P/TSX

    19,078.64
    -144.10 (-0.75%)
     
  • S&P 500

    3,818.83
    -2.72 (-0.07%)
     
  • DOW

    31,029.31
    +82.32 (+0.27%)
     
  • CAD/USD

    0.7762
    +0.0006 (+0.07%)
     
  • CRUDE OIL

    109.96
    +0.18 (+0.16%)
     
  • BTC-CAD

    25,822.10
    -560.74 (-2.13%)
     
  • CMC Crypto 200

    430.11
    -9.55 (-2.17%)
     
  • GOLD FUTURES

    1,820.50
    +3.00 (+0.17%)
     
  • RUSSELL 2000

    1,719.37
    -19.47 (-1.12%)
     
  • 10-Yr Bond

    3.0930
    -0.1130 (-3.52%)
     
  • NASDAQ futures

    11,649.25
    -41.75 (-0.36%)
     
  • VOLATILITY

    28.16
    -0.20 (-0.71%)
     
  • FTSE

    7,312.32
    -11.09 (-0.15%)
     
  • NIKKEI 225

    26,514.33
    -290.27 (-1.08%)
     
  • CAD/EUR

    0.7424
    -0.0001 (-0.01%)
     

Is 22nd Century Group (NASDAQ:XXII) In A Good Position To Invest In Growth?

  • Oops!
    Something went wrong.
    Please try again later.
·4 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for 22nd Century Group (NASDAQ:XXII) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for 22nd Century Group

How Long Is 22nd Century Group's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When 22nd Century Group last reported its balance sheet in March 2022, it had zero debt and cash worth US$39m. In the last year, its cash burn was US$28m. So it had a cash runway of approximately 16 months from March 2022. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
debt-equity-history-analysis

How Well Is 22nd Century Group Growing?

22nd Century Group actually ramped up its cash burn by a whopping 83% in the last year, which shows it is boosting investment in the business. That does give us pause, and we can't take much solace in the operating revenue growth of 19% in the same time frame. In light of the data above, we're fairly sanguine about the business growth trajectory. 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.

Can 22nd Century Group Raise More Cash Easily?

While 22nd Century Group seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

22nd Century Group has a market capitalisation of US$290m and burnt through US$28m last year, which is 9.7% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is 22nd Century Group's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought 22nd Century Group's cash burn relative to its market cap was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for 22nd Century Group that potential shareholders should take into account before putting money into a stock.

Of course 22nd Century Group 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting