As the US$22m market cap EdtechX Holdings Acquisition Corp. (NASDAQ:EDTX) released another year of negative earnings, investors may be on edge waiting for breakeven. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that EdtechX Holdings Acquisition is spending more money than it earns, it will need to fund its expenses via external sources of capital. EdtechX Holdings Acquisition 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?
With a negative free cash flow of -US$274.6k, EdtechX Holdings Acquisition is chipping away at its US$667k cash reserves in order to run its business. The biggest threat facing EdtechX Holdings Acquisition investors is the company going out of business when it runs out of money and cannot raise any more capital. EdtechX Holdings Acquisition operates in the asset management and custody banks industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. EdtechX Holdings Acquisition faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.
When will EdtechX Holdings Acquisition need to raise more cash?
We can measure EdtechX Holdings Acquisition'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.
Although this is a relatively simplistic calculation, and EdtechX Holdings Acquisition could reduce its costs or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the EdtechX Holdings Acquisition operation is, and when things may have to change.
I admit this is a fairly basic analysis for EDTX's financial health. Other important fundamentals need to be considered as well. You should continue to research EdtechX Holdings Acquisition to get a better picture of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EDTX’s future growth? Take a look at our free research report of analyst consensus for EDTX’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on EdtechX Holdings Acquisition’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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