Trailing twelve-month data shows us that Gulf Island Fabrication, Inc.'s (NASDAQ:GIFI) earnings loss has accumulated to -US$23.9m. Although some investors expected this, their belief in the path to profitability for Gulf Island Fabrication 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 Gulf Island Fabrication is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined Gulf Island Fabrication’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?
With a negative free cash flow of -US$798.0k, Gulf Island Fabrication is chipping away at its US$76m 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 high-risk energy industry. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
When will Gulf Island Fabrication need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Gulf Island Fabrication has to spend each year in order to keep its business running.
In Gulf Island Fabrication’s case, its cash outflows fell by 29% last year, which may signal the company moving towards a more sustainable level of expenses. If the company does not increase its cash burn next year and remains at the current level of -US$798.0k, then it should not need to raise further capital for the next few years. Even though this is analysis is fairly basic, and Gulf Island Fabrication still can cut its overhead further, 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, even those that are reducing their cash burn over time. 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 current level of cash reserves. This may lead to share price pressure in the near term, should Gulf Island Fabrication be forced to raise capital to fund its growth. I admit this is a fairly basic analysis for GIFI's financial health. Other important fundamentals need to be considered as well. You should continue to research Gulf Island Fabrication to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GIFI’s future growth? Take a look at our free research report of analyst consensus for GIFI’s outlook.
- Valuation: What is GIFI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GIFI is currently mispriced by the market.
- 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 email@example.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.