Trailing twelve-month data shows us that Andina Acquisition Corp. III's (NASDAQ:ANDA) earnings loss has accumulated to -US$171.3k. Although some investors expected this, their belief in the path to profitability for Andina Acquisition III may be wavering. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Andina Acquisition III is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Andina Acquisition III’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
What is cash burn?
Andina Acquisition III currently has US$444k in the bank, with negative free cash flow of -US$310.0k. The biggest threat facing Andina Acquisition III investors is the company going out of business when it runs out of money and cannot raise any more capital. Andina Acquisition III operates in the asset management and custody banks industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Andina Acquisition III faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.
When will Andina Acquisition III need to raise more cash?
One way to measure the cost to Andina Acquisition III of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
In Andina Acquisition III’s case, its cash outflows fell by 96% last year, which may signal the company moving towards a more sustainable level of expenses. Though, if the company kept its cash burn level at -US$310.0k, it may not need to raise capital for another 1.4 years. Although this is a relatively simplistic calculation, and Andina Acquisition III may continue to reduce its costs further or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the Andina Acquisition III operation is, and when things may have to change.
The risks involved in investing in loss-making Andina Acquisition III means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. 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. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. This is only a rough assessment of financial health, and ANDA likely also has company-specific issues impacting its cash management decisions. I suggest you continue to research Andina Acquisition III to get a better picture of the company by looking at:
- Historical Performance: What has ANDA'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 Andina Acquisition III’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 30 June 2019. 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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