Is A-Labs Capital II Corp. (CVE:ALAB.P) Growing Too Fast?
Trailing twelve-month data shows us that A-Labs Capital II Corp.'s (CVE:ALAB.P) earnings loss has accumulated to -CA$56.9k. Although some investors expected this, their belief in the path to profitability for A-Labs Capital II may be wavering. 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. 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 A-Labs Capital II’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 A-Labs Capital II
What is cash burn?
With a negative free cash flow of -CA$59.6k, A-Labs Capital II is chipping away at its CA$165k cash reserves in order to run its business. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. A-Labs Capital II 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. A-Labs Capital II 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 A-Labs Capital II need to raise more cash?
One way to measure the cost to A-Labs Capital II of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
Even though this is analysis is fairly basic, and A-Labs Capital II still can cut its overhead in the near future, or open a new line of credit instead of issuing new shares, 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.
Next Steps:
I admit this is a fairly basic analysis for ALAB.P's financial health. Other important fundamentals need to be considered as well. You should continue to research A-Labs Capital II to get a better picture of the company by looking at:
Historical Performance: What has ALAB.P'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 A-Labs Capital II’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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