Over the past six months, Byrna’s stock price fell to $19.79. Shareholders have lost 11.6% of their capital, which is disappointing considering the S&P 500 has climbed by 22.6%. This may have investors wondering how to approach the situation.
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Why Is Byrna Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons there are better opportunities than BYRN and a stock we'd rather own.
1. Operating Losses Sound the Alarms
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Although Byrna was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 1.7% over the last five years. Unprofitable industrials companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Byrna’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 9.9%, meaning it lit $9.90 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Byrna burned through $11.04 million of cash over the last year. With $9.00 million of cash on its balance sheet, the company has around 10 months of runway left (assuming its $2.43 million of debt isn’t due right away).
Unless the Byrna’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Byrna until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Byrna’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 21.8× forward EV-to-EBITDA (or $19.79 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward an all-weather company that owns household favorite Taco Bell.
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