As the UK£2.3m market cap Bermele plc (LON:BERM) released another year of negative earnings, investors may be on edge waiting for breakeven. 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. 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. Looking at Bermele’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?
Currently, Bermele has less than a million in cash holdings and producing negative free cash flow of -UK£68.4k. The biggest threat facing Bermele 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 pharma. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.
When will Bermele need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Bermele has to spend each year in order to keep its business running.
Even though this is analysis is fairly basic, and Bermele still can cut its overhead in the near future, or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Bermele operation is, and when things may have to change.
This is only a rough assessment of financial health, and BERM likely also has company-specific issues impacting its cash management decisions. I suggest you continue to research Bermele to get a more holistic view of the company by looking at:
- Historical Performance: What has BERM'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 Bermele’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 January 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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