Trailing twelve-month data shows us that Heliospectra AB (publ)'s (STO:HELIO) earnings loss has accumulated to -kr37.8m. Although some investors expected this, their belief in the path to profitability for Heliospectra 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. Selling new shares may dilute the value of existing shares on issue, and since Heliospectra is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Heliospectra’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
What is cash burn?
Heliospectra currently has kr29m in the bank, with negative free cash flow of -kr45.7m. The riskiest factor facing investors of Heliospectra is the potential for the company to run out of cash without the ability to raise more money. Heliospectra operates in the electrical components and equipment industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Heliospectra 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 Heliospectra need to raise more cash?
One way to measure the cost to Heliospectra of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
In the past year, free cash outflows rose by 15%, which is relatively reasonable for a small-cap company. This means that, if Heliospectra continues to grow its free cash outflows at this rate, given how much money it currently has in the bank, it will need to raise capital again in 1.2 years. Although this is a relatively simplistic calculation, and Heliospectra could reduce its costs or borrow money instead of raising new equity capital, 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.
Loss-making companies are a risky play, especially those that are still growing its cash burn at a high rate. Though, this shouldn’t discourage you from considering entering the stock in the future. The cash burn analysis result indicates a cash constraint for the company, due to its high cash burn growth and its level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Heliospectra need to raise capital to fund its growth. I admit this is a fairly basic analysis for HELIO's financial health. Other important fundamentals need to be considered as well. I recommend you continue to research Heliospectra to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HELIO’s future growth? Take a look at our free research report of analyst consensus for HELIO’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Heliospectra’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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