Analyzing Small Cap Stocks: Flow Beverage

The TDR Three Key Takeaways regarding Flow Beverage and Small Cap Stocks:

1. Flow Beverage’s products are widely available across North America and are found in upscale hotels, Starbucks, Walmart, and various other retail locations.
2. Consequently, the company incurs a loss on each sale, with the total cost of delivering a $3 product exceeding $5.50. 
3. Flow Beverage shows a high risk of insolvency with a credit score of -19.2.

Flow Beverage (TSX: FLOW, OTC: FLWBF), founded in 2015, operates in the bottled water industry with its innovative boxed water concept. Inspired by the environmental impact of plastic water bottles, the company offers high-pH water packaged in eco-friendly boxes.

Flow Beverage’s products are widely available across North America, found in upscale hotels, Starbucks, Walmart, and various other retail locations. This extensive market penetration demonstrates the brand’s popularity and consumer appeal. However, the company’s distribution network has not translated into financial success.

In the past five years, Flow Beverage reported an impressive compound annual growth rate (CAGR) of 50% in revenue, with a 26.7% CAGR over the last three years. Despite this historical growth, the revenue remained flat over the past twelve months at $45 million, indicating a stagnation that raises concerns given the highly competitive beverage market.

Flow Beverage faces significant challenges in profitability. The company’s gross margin is a mere 5.5%, meaning that for every $3 bottle of water sold, only 15 cents remain after production costs. This slim margin is further eroded by substantial selling, general, and administrative (SG&A) expenses, amounting to an additional $2.75 per bottle. Consequently, the company incurs a loss on each sale, with the total cost of delivering a $3 product exceeding $5.50.

The financial strain is evident in Flow Beverage’s net income and free cash flow figures. The company reported a net loss of $48 million last year. Levered free cash flow also paints a grim picture, with a loss of $25 million in the past year and $26 million the year before. These figures highlight the unsustainability of the current business model, where high production and operational costs far outweigh revenue.

Flow Beverage’s financial health is weak, reflected in its credit score of -19.2. This score signifies a high risk of insolvency within the next two years. The company’s substantial financial losses, combined with its inability to achieve profitability, present a significant red flag for potential investors in small-cap stocks.

Flow Beverage’s environmentally conscious product and market presence are commendable, but its high operational costs and consistent financial losses highlight substantial risks. Investors should carefully assess its financial health, as the company’s instability makes it a high-risk investment. Want to be updated on all things Psychedelic, Cannabis, AI, and Crypto? Subscribe to our Daily Baked in Newsletter!