Helius Medical Technologies, Inc. (NASDAQ:HSDT) 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Helius Medical Technologies is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Helius Medical Technologies’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?
With a negative free cash flow of -US$20.2m, Helius Medical Technologies is chipping away at its US$14m 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. Not surprisingly, it is more common to find unprofitable companies in the fast-growth healthcare industry. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.
When will Helius Medical Technologies need to raise more cash?
One way to measure the cost to Helius Medical Technologies of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
In Helius Medical Technologies’s case, its cash outflows fell by 30% last year, which may signal the company moving towards a more sustainable level of expenses. Given the level of cash left in the bank, if Helius Medical Technologies maintained its cash burn rate of -US$20.2m, it could still run out of cash within the next few of months. Even though this is analysis is fairly basic, and Helius Medical Technologies still can cut its overhead 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.
This analysis isn’t meant to deter you from Helius Medical Technologies, but rather, to help you better understand the risks involved investing in loss-making companies. 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 be able to get shares at a lower price if the company raises capital next. I admit this is a fairly basic analysis for HSDT's financial health. Other important fundamentals need to be considered as well. I suggest you continue to research Helius Medical Technologies to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HSDT’s future growth? Take a look at our free research report of analyst consensus for HSDT’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Helius Medical Technologies’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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