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What's The Outlook For Loss-Making Alpha Growth plc (LON:ALGW)?

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Simply Wall St
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Trailing twelve-month data shows us that Alpha Growth plc's (LON:ALGW) earnings loss has accumulated to -UK£585.9k. Although some investors expected this, their belief in the path to profitability for Alpha Growth may be wavering. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Alpha Growth is spending more money than it earns, it will need to fund its expenses via external sources of capital. Alpha Growth 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 Alpha Growth

What is cash burn?

Currently, Alpha Growth has UK£133k in cash holdings and producing negative free cash flow of -UK£557.1k. The biggest threat facing Alpha Growth investors is the company going out of business when it runs out of money and cannot raise any more capital. Alpha Growth 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. Alpha Growth 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.

LSE:ALGW Income Statement, September 19th 2019
LSE:ALGW Income Statement, September 19th 2019

When will Alpha Growth need to raise more cash?

We can measure Alpha Growth'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.

In Alpha Growth’s case, its cash outflows fell by 67% last year, which may signal the company moving towards a more sustainable level of expenses. However, the current level of cash is not enough to sustain Alpha Growth’s operations and the company may need to raise more capital within the year. Although this is a relatively simplistic calculation, and Alpha Growth may continue to reduce its costs further or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Alpha Growth operation is, and when things may have to change.

Next Steps:

The risks involved in investing in loss-making Alpha Growth 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. This may lead to share price pressure in the near term, should Alpha Growth be forced to raise capital to fund its growth. This is only a rough assessment of financial health, and ALGW likely also has company-specific issues impacting its cash management decisions. I suggest you continue to research Alpha Growth to get a better picture of the company by looking at:

  1. Historical Performance: What has ALGW'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.

  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Alpha Growth’s board and the CEO’s back ground.

  3. 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 28 February 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.