EVR Holdings plc (LON:EVRH) 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 EVR Holdings is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined EVR Holdings’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?
EVR Holdings currently has UK£19m in the bank, with negative free cash flow of -UK£12.5m. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Unprofitable companies operating in the fast-growing tech industry often face this problem, and EVR Holdings 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 EVR Holdings need to raise more cash?
We can measure EVR Holdings'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 75% over the past year, which could be an indication of EVR Holdings putting the brakes on ramping up high growth. But, if the company maintains its cash burn at the current level of -UK£12.5m, it may still need additional capital within the next 1.5 years. Although this is a relatively simplistic calculation, and EVR Holdings may continue to reduce its costs further or borrow money instead of raising new equity capital, the outcome of 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.
The risks involved in investing in loss-making EVR Holdings 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 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 EVR Holdings come to market to fund its operations. I admit this is a fairly basic analysis for EVRH's financial health. Other important fundamentals need to be considered as well. You should continue to research EVR Holdings to get a more holistic view of the company by looking at:
- Historical Performance: What has EVRH'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 EVR Holdings’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 December 2018. 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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