When Will LAIX Inc. (NYSE:LAIX) Run Out Of Cash?
LAIX Inc. (NYSE:LAIX) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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. Selling new shares may dilute the value of existing shares on issue, and since LAIX is currently burning more cash than it is making, it’s likely the business will need funding for future growth. LAIX 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.
See our latest analysis for LAIX
What is cash burn?
With a negative free cash flow of -CN¥156.0m, LAIX is chipping away at its CN¥729m cash reserves in order to run its business. The riskiest factor facing investors of LAIX is the potential for the company to run out of cash without the ability to raise more money. LAIX operates in the education services industry, which delivered positive earnings in the past year. This means, on average, its industry peers are profitable. LAIX runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will LAIX need to raise more cash?
One way to measure the cost to LAIX of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
In LAIX’s case, its cash outflows fell by 61% last year, which may signal the company moving towards a more sustainable level of expenses. If LAIX kept its cash burn rate at -CN¥156.0m, it may not need to raise capital for another couple of years. Although this is a relatively simplistic calculation, and LAIX may continue to reduce its costs further or borrow money instead of raising new equity capital, this analysis still helps us understand how sustainable the LAIX operation is, and when things may have to change.
Next Steps:
Investors can breathe easy knowing that LAIX likely won’t be raising new capital any time soon. Although we haven’t accounted for all possible expenses for the company, on a high level, we believe the company doesn’t have an immediate cash problem based on this cash burn analysis. Now that we’ve accounted for cash burn growth, you should also look at expected revenue growth in order to gauge when the company may become breakeven. This is only a rough assessment of financial health, and LAIX likely also has company-specific issues impacting its cash management decisions. You should continue to research LAIX to get a more holistic view of the company by looking at:
Historical Performance: What has LAIX'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 LAIX’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 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.
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