In the most recent twelve months, Hudson Global Inc’s (NASDAQ:HSON) earnings loss has accumulated to -$2.09M. Although some investors expected this, their belief in the path to profitability for HSON may be wavering. The single most important question to ask when you’re investing in a loss-making company is – will they need to raise cash again, and if so, when? Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to come back to market for additional capital raising. This may not always be on their own terms, which could hurt current shareholders if the new deal lowers the value of their shares. HSON 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. View our latest analysis for Hudson Global
What is cash burn?
Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, HSON has $14.86M in cash holdings and producing negative cash flows from its day-to-day activities of -$3.86M. How fast HSON runs down its cash supply over time is known as the cash burn rate. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. HSON operates in the human resource and employment services industry, which has an average EPS of $1.79, meaning the majority of HSON’s peers are profitable. HSON 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 HSON need to raise more cash?
Opex, or operational expenses, are the necessary costs HSON must pay to keep the business running every day. These include employee salaries and other overhead. Opex declined by 9.65% over the past year, which could be an indication of HSON putting the brakes on ramping up high growth. However, this cost-reduction initiative is still not enough. Given the level of cash left in the bank, if HSON maintained its opex level of $173.1M, it will still run out of cash within the next couples of months. Even though this is analysis is fairly basic, and HSON still can cut its overhead further, or raise debt capital instead of coming to equity markets, the analysis still helps us understand how sustainable the HSON’s operation is, and when things may have to change.
What this means for you:
Are you a shareholder? HSON is inherently risky due to its current cash flow position. It is loss making and it is also burning through its cash at a fast rate. The outcome of this analysis should shed some light on HSON’s cash situation and the risks you may or may not have been aware of as a shareholder of the company. In addition to this analysis, I suggest you take a look at their expected revenue growth to determine the timing of future profitability as well.
Are you a potential investor? The risks involved in investing in loss-making HSON 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 outcome of my analysis suggests that even if HSON maintains this negative rate of opex growth, it will run out of cash within the year. An opportunity may exist for you to enter into the stock at an attractive price, should HSON come to market to fund its operations.
An experienced management team on the helm increases our confidence in the business – have a peek at HSON’s CEO experience and the tenure of the board here. If risky loss-making stocks do not appeal to you, see my list of highly profitable companies to add to your portfolio..NB: Figures in this article are calculated using data from the last twelve months, which refer to the 12-month period ending on the last date of the month the financial statement is dated. This may not be consistent with full year annual report figures.