How Long Will Loss-Making Sprintex Limited (ASX:SIX) Survive?

Trailing twelve-month data shows us that Sprintex Limited’s (ASX:SIX) earnings loss has accumulated to -AU$3.33M. Although some investors expected this, their belief in the path to profitability for Sprintex may be wavering. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. 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. Sprintex 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 Sprintex

What is cash burn?

Sprintex currently has AU$782.71K in the bank, with negative cash flows from operations of -AU$1.16M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. The most significant threat facing investor is the company going out of business when it runs out of money and cannot raise any more capital. Sprintex operates in the auto parts and equipment industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Sprintex 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.

ASX:SIX Income Statement Apr 4th 18
ASX:SIX Income Statement Apr 4th 18

When will Sprintex need to raise more cash?

Opex, or operational expenses, are the necessary costs Sprintex 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. Opex (excluding one-offs) grew by 2.06% over the past year, which is relatively reasonable for a small-cap company. But, if Sprintex continues to ramp up its opex at this rate, given how much money it currently has in the bank, it will actually need to come to market again within the next year. Moreover, even if Sprintex kept its opex level at AU$3.30M, it will still have to come to market within the next year. Although this is a relatively simplistic calculation, and Sprintex may reduce its costs or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the Sprintex’s operation is, and when things may have to change.

Next Steps:

The risks involved in investing in loss-making Sprintex 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 the company 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 Sprintex come to market to fund its growth. Keep in mind I haven’t considered other factors such as how SIX is expected to perform in the future. I recommend you continue to research Sprintex to get a better picture of the company by looking at:
  1. Historical Performance: What has SIX’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 Sprintex’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.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 December 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.