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Should You Worry About Analytica Limited's (ASX:ALT) Cash Runway?

Simply Wall St

Analytica Limited (ASX:ALT) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Analytica 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.

Check out our latest analysis for Analytica

What is cash burn?

Analytica currently has AU$1.8m in the bank, with negative free cash flow of -AU$1.9m. The riskiest factor facing investors of Analytica is the potential for the company to run out of cash without the ability to raise more money. 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.

ASX:ALT Income Statement, September 19th 2019

When will Analytica need to raise more cash?

We can measure Analytica'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 grew by 14% over the past year, which is relatively reasonable for a small-cap company. My cash burn analysis suggests that, if Analytica continues to spend its cash reserves at this current rate, it’ll have to raise capital within the next 10 months, which may be a surprise to some shareholders. Furthermore, even if Analytica kept its cash burn rate at the current -AU$1.9m, it could still require additional capital in the next couple of months. Although this is a relatively simplistic calculation, and Analytica 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.

Next Steps:

The risks involved in investing in loss-making Analytica means you should think twice before diving into the stock. However, this should not prevent you from further researching its investment potential. 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 Analytica raise capital to fund its growth. This is only a rough assessment of financial health, and ALT likely also has company-specific issues impacting its cash management decisions. I recommend you continue to research Analytica to get a more holistic view of the company by looking at:

  1. Historical Performance: What has ALT'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 Analytica’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 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.

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.