In the most recent twelve months, Kromek Group plc’s (AIM:KMK) earnings loss has accumulated to -£3.08M. Although some investors expected this, their belief in the path to profitability for KMK may be wavering. 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. Additional cash raising may dilute the value of your shares, and since KMK is currently burning more cash than it is making, it’s likely the business will need funding for future growth. KMK 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 Kromek Group
What is cash burn?
KMK’s expenses are currently higher than the money it makes from its day-to-day operations, which means it is funding its overhead with equity capital a.k.a. its cash. With a negative operating cash flow of -£1.50M, KMK is chipping away at its £20.34M cash reserves in order to run its business. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. KMK operates in the semiconductors industry, which delivered a positive EPS of £4.77 in the past year. This means, on average, KMK’s industry peers operating are profitable. KMK runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will KMK need to raise more cash?
KMK has to pay its employees and other necessities such as rent and admin costs in order to keep its business running. These costs are called operational expenses, which is sometimes shortened to opex. Opex (excluding one-offs) grew by 5.78% over the past year, which is relatively reasonable for a small-cap company. However, if KMK continues to grow its opex at this rate, given how much money it currently has in the bank, it will need to raise capital again in 2.2 years. Furthermore, even if KMK kept its opex level at the current £8.9M, it will still be coming to market in about 2.3 years. Although this is a relatively simplistic calculation, and KMK may reduce its costs or raise debt capital instead of coming to equity markets, 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.
What this means for you:
Are you a shareholder? If KMK makes up a reasonable portion of your portfolio, it’s always wise to consider cushioning your holdings with less risky, profitable stocks. You now have a better understanding of the risks you may face holding onto the stock, since we know the company could potentially run into some issues in the next couple of years. Keep in mind that opex is only one side of the coin. I recommend also looking at KMK’s revenues in order to forecast when the company will become breakeven and start producing profits for shareholders.
Are you a potential investor? This analysis isn’t meant to deter you from buying KMK, but rather, to help you better understand the risks involved investing in loss-making companies. Now you know that if KMK were to continue to grow its opex at its current rate, it will not be able to sustain its operations given the current level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should KMK come to market to fund its growth.
Good management manages cash well – take a look at who sits on KMK’s board and the CEO’s back ground and experience here. If you believe you should cushion your portfolio with something less risky, scroll through 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. Operating expenses include only SG&A and one-year R&D.