Shareholders of Byrna would probably like to forget the past six months even happened. The stock dropped 31.9% and now trades at $12.89. This might have investors contemplating their next move.
Is there a buying opportunity in Byrna, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Byrna Not Exciting?
Despite the more favorable entry price, we're swiping left on Byrna for now. Here are three reasons we avoid BYRN and a stock we'd rather own.
1. Breakeven Operating Margin Raises Questions
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Byrna was roughly breakeven when averaging the last five years of quarterly operating profits, one of the worst outcomes in the industrials sector.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
While Byrna posted positive free cash flow this quarter, the broader story hasn’t been so clean. 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 6%, meaning it lit $5.99 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 $9.20 million of cash over the last year. With $15.48 million of cash on its balance sheet, the company has around 20 months of runway left (assuming its $2.35 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 isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 27.4× forward P/E (or $12.89 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
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