Trailing twelve-month data shows us that MDJM Ltd.'s (NASDAQ:MDJH) earnings loss has accumulated to -US$254.7k. Although some investors expected this, their belief in the path to profitability for MDJM may be wavering. 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that MDJM is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at MDJM’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
What is cash burn?
Currently, MDJM has US$6.1m in cash holdings and producing negative free cash flow of -US$324.2k. The biggest threat facing MDJM investors is the company going out of business when it runs out of money and cannot raise any more capital. MDJM operates in the real estate services industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. MDJM 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 MDJM need to raise more cash?
We can measure MDJM'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 112% over the past year, which could be an indication of MDJM putting the brakes on ramping up high growth. If MDJM kept its cash burn rate at -US$324.2k, it may not need to raise capital for another couple of years. Although this is a relatively simplistic calculation, and MDJM may continue to reduce its costs further or borrow money instead of raising new equity capital, 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.
Investors shouldn’t expect MDJM to raise capital anytime soon, according to the outcome of this analysis. 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. cash burn is only one side of the coin. I recommend also looking at revenues in order to forecast when the company will become breakeven and start producing profits for shareholders. This is only a rough assessment of financial health, and MDJH likely also has company-specific issues impacting its cash management decisions. I recommend you continue to research MDJM to get a more holistic view of the company by looking at:
- Historical Performance: What has MDJH'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 MDJM’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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