DarioHealth Corp. (NASDAQ:DRIO) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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 DarioHealth is currently burning more cash than it is making, it’s likely the business will need funding for future growth. DarioHealth 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.
What is cash burn?
Currently, DarioHealth has US$8.0m in cash holdings and producing negative free cash flow of -US$16.3m. The biggest threat facing DarioHealth investors is the company going out of business when it runs out of money and cannot raise any more capital. Not surprisingly, it is more common to find unprofitable companies in the fast-growth healthcare industry. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or falling behind competition on innovation and gaining market share by investing too slowly.
When will DarioHealth need to raise more cash?
We can measure DarioHealth'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.
In DarioHealth’s case, its cash outflows fell by 16% last year, which may signal the company moving towards a more sustainable level of expenses. However, the current level of cash is not enough to sustain DarioHealth’s operations and the company may need to raise more capital within the year. Although this is a relatively simplistic calculation, and DarioHealth 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 DarioHealth operation is, and when things may have to change.
The risks involved in investing in loss-making DarioHealth means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. Now you know that even if the company was to continue to shrink its cash burn at this rate, it will not be able to sustain its operations given the current level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should DarioHealth be required to raise new funds to continue operating. I admit this is a fairly basic analysis for DRIO's financial health. Other important fundamentals need to be considered as well. You should continue to research DarioHealth to get a better picture of the company by looking at:
Future Outlook: What are well-informed industry analysts predicting for DRIO’s future growth? Take a look at our free research report of analyst consensus for DRIO’s outlook.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on DarioHealth’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.
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 email@example.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.