Linius Technologies Limited (ASX:LNU) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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 LNU is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined LNU’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. View our latest analysis for Linius Technologies
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, LNU has A$0.96M in cash holdings and producing negative cash flows from its day-to-day activities of -A$3.04M. How fast LNU runs down its cash supply over time is known as the cash burn rate. The riskiest factor facing investors of LNU is the potential for the company to run out of cash without the ability to raise more money, i.e. LNU goes out of business. Furthermore, it is not uncommon to find loss-makers in an industry such as tech. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or the risk of falling behind competition on innovation and gaining market share by investing too slowly.
When will LNU need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for LNU 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. Opex (excluding one-offs) grew by 60.96% over the past year, which is considerably high. This means that, if LNU 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 4 months! Furthermore, even if LNU kept its opex level at the current A$3.48M, it will still be coming to market in the next couple of months. Although this is a relatively simplistic calculation, and LNU may reduce its costs or open a new line of credit instead of issuing new equity shares, the outcome of this analysis still helps us understand how sustainable the LNU’s operation is, and when things may have to change.
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 LNU. The outcome of this analysis should shed some light on LNU’s cash situation and the risks you may or may not have been aware of as a shareholder of the company. Keep in mind that opex is only one side of the coin. I recommend also looking at LNU’s revenues in order to forecast when the company will become breakeven and start producing profits for shareholders.
Are you a potential investor? The risks involved in investing in loss-making LNU 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 if LNU maintains the rate of opex growth, it will run out of cash within the year. This suggests an opportunity to enter into the stock, potentially at an attractive price, should LNU come to market to fund its growth.
Good management manages cash well – have a peek at LNU’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. Operating expenses include only SG&A and one-year R&D.