How Much Money Does The GO2 People Limited (ASX:GO2) Have Left?

As the A$23.00M market cap The GO2 People Limited (ASX:GO2) released another year of negative earnings, investors may be on edge waiting for breakeven. 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. Today I’ve examined GO2 People’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. Check out our latest analysis for GO2 People

What is cash burn?

GO2 People’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$2.90M, GO2 People is chipping away at its A$0.55M cash reserves in order to run its business. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. GO2 People operates in the human resource and employment services industry, which has an average EPS of A$0.62, meaning the majority of its peers are profitable. GO2 People 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:GO2 Income Statement Dec 13th 17
ASX:GO2 Income Statement Dec 13th 17

When will GO2 People need to raise more cash?

GO2 People 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. In this calculation I’ve only included recurring sales, general and admin (SG&A) expenses, and R&D expenses occured within they year. Opex (excluding one-offs) grew by 70.26% over the past year, which is considerably high. Not surprisingly, if GO2 People continues to ramp up expenditure at this rate for the upcoming year, it’ll likely need to come to market within the next few months, given the its current level of cash reserves. Moreover, even if GO2 People kept its opex level at A$5.86M, it will still have to come to market within the next year. Even though this is analysis is fairly basic, and GO2 People still can cut its overhead in the near future, or open a new line of credit instead of issuing new equity shares, the outcome of this analysis still helps us understand how sustainable the GO2 People’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 GO2 People. The outcome of this analysis should shed some light on the company’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 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. Now you know that if the company was to continue to grow its opex at a double-digit rate, it will not be able to sustain its operations given the current level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should GO2 People come to market to fund its growth.

An experienced management team on the helm increases our confidence in the business – have a peek at GO2 People’s CEO experience and the tenure of the board 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.