In the most recent twelve months, Sprintex Limited’s (ASX:SIX) earnings loss has accumulated to -A$4.32M. Although some investors expected this, their belief in the path to profitability for Sprintex may be wavering. 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 Sprintex is currently burning more cash than it is making, it’s likely the business will need funding for future growth. 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. View our latest analysis for Sprintex
What is cash burn?
Sprintex currently has A$0.20M in the bank, with negative cash flows from operations of -A$1.30M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. How fast Sprintex runs down its cash supply over time is known as the cash burn rate. 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 delivered a positive EPS of A$168.76 in the past year. This means, on average, its industry peers operating are profitable. Sprintex runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will Sprintex need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for Sprintex 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. Over the last twelve months, opex (excluding one-offs) increased by 3.51%, which is relatively appropriate 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. This is also the case if Sprintex maintains its opex level of A$3.3M, without growth, going forward. Although this is a relatively simplistic calculation, and Sprintex may reduce its costs or raise debt capital instead of coming to equity markets, the outcome of this 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 Sprintex makes up a reasonable portion of your portfolio, it’s always wise to consider cushioning your holdings with less risky, profitable stocks. Hopefully, the analysis has shed some light on the risks you should bear in mind as a shareholder, in particular, its tight cash runway moving forward. In addition to this analysis, I suggest you take a look at their expected revenue growth to determine the timing of future profitability as well.
Are you a potential investor? This analysis isn’t meant to deter you from buying Sprintex, but rather, to help you better understand the risks involved investing in loss-making companies. 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.
Good management manages cash well – have a peek at Sprintex’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 trailing twelve months from 30 June 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.