Innsuites Hospitality Trust (AMEX:IHT) continues its loss-making streak, announcing a -$2.68M earnings for its latest financial year ending. The single most important question to ask when you’re investing in a loss-making company is – will they need to raise cash again, and if so, when? Below, I’ve analysed the most recent financial data to help answer this question. View our latest analysis for Innsuites Hospitality Trust
What is cash burn?
IHT currently has $7.48M in the bank, with negative cash flows from operations of -$1.01M. The biggest threat facing IHT’s investor is the company going out of business when it runs out of money and cannot raise any more capital. IHT operates in the hotels, resorts and cruise lines industry, which has an average EPS of $2.92, meaning the majority of IHT’s peers are profitable. IHT 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 IHT need to raise more cash?
In the past year, opex (excluding one-offs) rose by 7.38%, which is fairly normal for a small-cap. This means that, if IHT continues to grow its opex at this rate, given how much money it currently has in the bank, it will need to raise capital again in 1.1 years. Furthermore, even if IHT kept its opex level at the current $6.5M, it will still be coming to market in about 1.2 years.
Even though this is analysis is fairly basic, and IHT still can cut its overhead in the near future, or raise debt capital instead of coming to equity markets, 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.
What this means for you:
Are you a shareholder? You now have a better understanding of the risks you may face holding onto the stock, since we know the company could potentially run into some issues in the next couple of years. Keep in mind that opex is only one side of the coin. I recommend also looking at IHT’s revenues in order to forecast when the company will become breakeven and start producing profits for shareholders.
Are you a potential investor? This analysis isn’t meant to deter you from buying IHT, but rather, to help you understand the risks involved investing in loss-making companies. Now you know that if IHT were to continue to grow its opex at its current rate, it will not be able to sustain its operations given the current level of cash reserves. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next.
An experienced management team on the helm increases our confidence in the business – take a look at who sits on IHT’s board and the CEO’s back ground and experience here. If you believe you should cushion your portfolio with something less risky, scroll through my list of highly profitable companies to add to your portfolio..
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.