In the most recent twelve months, CropLogic Limited’s (ASX:CLI) earnings loss has accumulated to -$1.34M. Although some investors expected this, their belief in the path to profitability for CLI 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. Looking at CLI’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. View our latest analysis for CropLogic
What is cash burn?
CLI’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 -$1.03M, CLI is chipping away at its $0.08M cash reserves in order to run its business. The measure of how fast CLI 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. CLI operates in the research and consulting services industry, which has an average EPS of $0.61, meaning the majority of CLI’s peers are profitable. CLI 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 CLI need to raise more cash?
Opex, or operational expenses, are the necessary costs CLI must pay to keep the business running every day. These include employee salaries and other overhead. Over the last twelve months, opex (excluding one-offs) increased by 27.57%, which is considerably high. This means that, if CLI 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 within the next couple of months! Furthermore, even if CLI kept its opex level at the current $1.1M, it will still be coming to market in the next couple of months. Even though this is analysis is fairly basic, and CLI 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 helps us understand how sustainable the CLI’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 CLI. 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? The risks involved in investing in loss-making CLI 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 cash burn analysis result indicates a cash constraint for CLI, due to its high opex growth and its level of cash reserves. 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.
An experienced management team on the helm increases our confidence in the business – have a peek at CLI’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.