Trailing twelve-month data shows us that Adriatic Metals PLC's (ASX:ADT) earnings loss has accumulated to -UK£2.4m. Although some investors expected this, their belief in the path to profitability for Adriatic Metals may be wavering. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Today I’ve examined Adriatic Metals’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
What is cash burn?
Currently, Adriatic Metals has UK£7.8m in cash holdings and producing negative free cash flow of -UK£3.8m. The biggest threat facing Adriatic Metals investors is the company going out of business when it runs out of money and cannot raise any more capital. Furthermore, it is not uncommon to find loss-makers in an industry such as metals and mining. Although these companies can be unprofitable now, they tend to take on project-work, which can payoff sometime in the future.
When will Adriatic Metals need to raise more cash?
One way to measure the cost to Adriatic Metals of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
Free cash outflows declined by 82% over the past year, which could be an indication of Adriatic Metals putting the brakes on ramping up high growth. But, if the company maintains its cash burn at the current level of -UK£3.8m, it may still need additional capital within the next 2 years. Even though this is analysis is fairly basic, and Adriatic Metals still can cut its overhead further, or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the Adriatic Metals operation is, and when things may have to change.
This analysis isn’t meant to deter you from Adriatic Metals, but rather, to help you better understand the risks involved investing in loss-making companies. The outcome of my analysis suggests that even if the company maintains this rate of cash burn growth, it will run out of cash within the year. This may lead to share price pressure in the near term, should Adriatic Metals be forced to raise capital to fund its growth. This is only a rough assessment of financial health, and ADT likely also has company-specific issues impacting its cash management decisions. You should continue to research Adriatic Metals to get a more holistic view of the company by looking at:
- Historical Performance: What has ADT's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Adriatic Metals’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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