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BidEnergy Limited's (ASX:BID) Single Biggest Risk For Investors

Simply Wall St

As the AU$72m market cap BidEnergy Limited (ASX:BID) 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that BidEnergy is spending more money than it earns, it will need to fund its expenses via external sources of capital. BidEnergy may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.

View our latest analysis for BidEnergy

What is cash burn?

With a negative free cash flow of -AU$3.8m, BidEnergy is chipping away at its AU$4.2m cash reserves in order to run its business. The riskiest factor facing investors of BidEnergy is the potential for the company to run out of cash without the ability to raise more money. Unprofitable companies operating in the fast-growing tech industry often face this problem, and BidEnergy is no exception. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.

ASX:BID Income Statement, September 19th 2019

When will BidEnergy need to raise more cash?

One way to measure the cost to BidEnergy of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).

Over the last twelve months, free cash outflows increased by 8.4%, which is relatively reasonable for a small-cap company. This means that, if BidEnergy continues to grow its cash burn at this rate, given how much money it currently has in the bank, it will actually need to raise capital again in within the next 9 months! But if cash burn is maintained at the current level of -AU$3.8m, then BidEnergy will have to raise capital again in 1.1 years. Even though this is analysis is fairly basic, and BidEnergy still can cut its overhead in the near future, or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the BidEnergy operation is, and when things may have to change.

Next Steps:

This analysis isn’t meant to deter you from BidEnergy, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its current cash burn growth rate and its level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should BidEnergy have to issue new shares to fund its growth. I admit this is a fairly basic analysis for BID's financial health. Other important fundamentals need to be considered as well. You should continue to research BidEnergy to get a more holistic view of the company by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for BID’s future growth? Take a look at our free research report of analyst consensus for BID’s outlook.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on BidEnergy’s board and the CEO’s back ground.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.