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Hancock Jaffe Laboratories, Inc.'s (NASDAQ:HJLI) Single Biggest Risk For Investors

Simply Wall St

Trailing twelve-month data shows us that Hancock Jaffe Laboratories, Inc.'s (NASDAQ:HJLI) earnings loss has accumulated to -US$6.8m. Although some investors expected this, their belief in the path to profitability for Hancock Jaffe Laboratories may be wavering. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Today I’ve examined Hancock Jaffe Laboratories’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.

Check out our latest analysis for Hancock Jaffe Laboratories

What is cash burn?

Hancock Jaffe Laboratories currently has US$4.5m in the bank, with negative free cash flow of -US$6.3m. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Furthermore, it is not uncommon to find loss-makers in an industry such as healthcare. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.

NasdaqCM:HJLI Income Statement, September 19th 2019

When will Hancock Jaffe Laboratories need to raise more cash?

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

Free cash outflows declined by 24% over the past year, which could be an indication of Hancock Jaffe Laboratories putting the brakes on ramping up high growth. However, the current level of cash is not enough to sustain Hancock Jaffe Laboratories’s operations and the company may need to raise more capital within the year. Although this is a relatively simplistic calculation, and Hancock Jaffe Laboratories may continue to reduce its costs further or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Hancock Jaffe Laboratories operation is, and when things may have to change.

Next Steps:

The risks involved in investing in loss-making Hancock Jaffe Laboratories 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. This may lead to share price pressure in the near term, should Hancock Jaffe Laboratories be forced to raise capital to fund its growth. Keep in mind I haven't considered other factors such as how HJLI is expected to perform in the future. I suggest you continue to research Hancock Jaffe Laboratories to get a better picture of the company by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for HJLI’s future growth? Take a look at our free research report of analyst consensus for HJLI’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 Hancock Jaffe Laboratories’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.