What’s The Cash Runway For Xylitol Canada Inc (TSXV:XYL)?

Xylitol Canada Inc (TSXV:XYL) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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 XYL is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at XYL’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. See our latest analysis for XYL

What is cash burn?

XYL’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 -$2.70M, XYL is chipping away at its $0.80M cash reserves in order to run its business. The measure of how fast XYL goes through its cash reserves over time is called the cash burn rate. The riskiest factor facing investors of XYL is the potential for the company to run out of cash without the ability to raise more money, i.e. XYL goes out of business. XYL operates in the packaged foods and meats industry, which has an average EPS of $2.35, meaning the majority of XYL’s peers are profitable. XYL 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.

TSXV:XYL Income Statement Oct 21st 17
TSXV:XYL Income Statement Oct 21st 17

When will XYL need to raise more cash?

XYL 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. Over the last twelve months, opex (excluding one-offs) increased by 10.06%, which is relatively reasonable for a small-cap company. My cash burn analysis suggests that, if XYL continues to spend its cash reserves at this current rate, it’ll have to raise capital within the next 3 months, which may be a surprise to some shareholders. This is also the case if XYL maintains its opex level of $3.6M, without growth, going forward. Although this is a relatively simplistic calculation, and XYL may reduce its costs or raise debt capital instead of coming to equity markets, 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? If XYL makes up a reasonable portion of your portfolio, it’s always wise to consider cushioning your holdings with less risky, profitable stocks. The outcome of this analysis should shed some light on XYL’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 XYL’s revenues in order to forecast when the company will become breakeven and start producing profits for shareholders.

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 cash burn analysis result indicates a cash constraint for XYL, due to its high opex growth and its level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should XYL come to market to fund its growth.

An experienced management team on the helm increases our confidence in the business – take a look at who sits on XYL’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.