Leisure Acquisition Corp. (NASDAQ:LACQ) 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 Leisure Acquisition is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Leisure 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$1.3m, Leisure Acquisition is chipping away at its US$1.4m 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. Leisure 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. Leisure 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 Leisure Acquisition need to raise more cash?
We can measure Leisure 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.
Free cash outflows declined by 34% over the past year, which could be an indication of Leisure Acquisition putting the brakes on ramping up high growth. But, if the company maintains its cash burn at the current level of -US$1.3m, it may still need additional capital within the next 1.1 years. Even though this is analysis is fairly basic, and Leisure Acquisition still can cut its overhead further, or open a new line of credit instead of issuing new shares, 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.
The risks involved in investing in loss-making Leisure Acquisition means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. The potential equity raising resulting from this means you might get a better deal on the share price if the company the company raises capital again. I admit this is a fairly basic analysis for LACQ's financial health. Other important fundamentals need to be considered as well. I recommend you continue to research Leisure Acquisition to get a better picture of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LACQ’s future growth? Take a look at our free research report of analyst consensus for LACQ’s outlook.
- Valuation: What is LACQ worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LACQ is currently mispriced by the market.
- 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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