Advanced Braking Technology Limited (ASX:ABV) 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? Additional cash raising may dilute the value of your shares, and since Advanced Braking Technology is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Advanced Braking Technology 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. Check out our latest analysis for Advanced Braking Technology
What is cash burn?
Advanced Braking Technology’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 -A$0.81M, Advanced Braking Technology is chipping away at its A$1.73M cash reserves in order to run its business. How fast Advanced Braking Technology runs down its cash supply over time is known as the cash burn rate. The riskiest factor facing investors of the company is the potential for the company to run out of cash without the ability to raise more money, i.e. the company goes out of business. Advanced Braking Technology operates in the auto parts and equipment industry, which has an average EPS of A$160.53, meaning the majority of its peers are profitable. Advanced Braking Technology 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 Advanced Braking Technology need to raise more cash?
Opex, or operational expenses, are the necessary costs Advanced Braking Technology must pay to keep the business running every day. For the purpose of this calculation I’ve only accounted for sales, general and admin (SG&A) expenses, and R&D expenses incurred within this year. In Advanced Braking Technology’s case, its opex fell by 16.49% last year, which may signal the company moving towards a more sustainable level of expenses. However, this cost-reduction initiative is still not enough. Given the level of cash left in the bank, if Advanced Braking Technology maintained its opex level of A$3.43M, it will still run out of cash within the next couples of months. Although this is a relatively simplistic calculation, and Advanced Braking Technology may continue to reduce its costs further or raise debt capital instead of coming to equity markets, the outcome of this analysis still helps us understand how sustainable the Advanced Braking Technology’s operation is, and when things may have to change.
What this means for you:
This analysis isn’t meant to deter you from Advanced Braking Technology, but rather, to help you better understand the risks involved investing in loss-making companies. The outcome of my analysis suggests that even if the company maintains this negative rate of opex growth, it will run out of cash within the year. An opportunity may exist for you to enter into the stock at an attractive price, should Advanced Braking Technology come to market to fund its operations. I admit this is a fairly basic analysis for ABV’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Advanced Braking Technology to get a better picture of the company by looking at:- 1. Historical Performance: What has ABV’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Advanced Braking Technology’s board and the CEO’s back ground.
- 3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.