Trailing twelve-month data shows us that Digimarc Corporation's (NASDAQ:DMRC) earnings loss has accumulated to -US$32.8m. Although some investors expected this, their belief in the path to profitability for Digimarc 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. Selling new shares may dilute the value of existing shares on issue, and since Digimarc is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Digimarc’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?
With a negative free cash flow of -US$24.2m, Digimarc is chipping away at its US$50m cash reserves in order to run its business. The riskiest factor facing investors of Digimarc 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 Digimarc is no exception. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.
When will Digimarc need to raise more cash?
We can measure Digimarc's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
Free cash outflows declined by 18% over the past year, which could be an indication of Digimarc putting the brakes on ramping up high growth. But, if the company maintains its cash burn at the current level of -US$24.2m, it may still need additional capital within the next 2.1 years. Even though this is analysis is fairly basic, and Digimarc still can cut its overhead further, or open a new line of credit instead of issuing new shares, this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
Loss-making companies are a risky play, even those that are reducing their cash burn over time. Though, this shouldn’t discourage you from considering entering the stock in the future. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should Digimarc come to market to fund its operations. Keep in mind I haven't considered other factors such as how DMRC is expected to perform in the future. I recommend you continue to research Digimarc to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DMRC’s future growth? Take a look at our free research report of analyst consensus for DMRC’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Digimarc’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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