In the most recent twelve months, Audioboom Group plc’s (AIM:BOOM) earnings loss has accumulated to -£5.13M. Although some investors expected this, their belief in the path to profitability for BOOM 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? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that BOOM is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined BOOM’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. See our latest analysis for BOOM
What is cash burn?
BOOM’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 -£5.03M, BOOM is chipping away at its £3.25M cash reserves in order to run its business. The measure of how fast BOOM goes through its cash reserves over time is called 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. Furthermore, it is not uncommon to find loss-makers in an industry such as tech. 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 BOOM need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for BOOM to continue its operations. In this case I’ve only accounted for sales, general and admin (SG&A) expenses, and basic R&D expenses incurred within this year. Over the last twelve months, opex (excluding one-offs) increased by 25.94%, which is considerably high. This means that, if BOOM continues to grow its opex at this rate, given how much money it currently has in the bank, it will actually need to raise capital again in within the next 7 months! Furthermore, even if BOOM kept its opex level at the current £5.9M, it will still be coming to market in the next couple of months. Even though this is analysis is fairly basic, and BOOM still can cut its overhead in the near future, or open a new line of credit instead of issuing new equity shares, the 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? In the context of your portfolio, you should always seek to diversify, especially if you have a relatively high exposure to BOOM. 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 months. Now that we’ve accounted for opex growth, you should also look at expected revenue growth in order to gauge when the company may become breakeven.
Are you a potential investor? Loss-making companies are a risky play, especially those that are still growing its opex at a high rate. Though, this shouldn’t discourage you from considering entering the stock in the future. The outcome of my analysis suggests that if BOOM maintains the rate of opex growth, it will run out of cash within the year. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next.
Good management manages cash well – take a look at who sits on BOOM’s board and the CEO’s back ground and experience 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. Operating expenses include only SG&A and one-year R&D.