Should You Buy The GO2 People Limited (ASX:GO2) For This Reason?

As the AU$15.93M 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that GO2 People is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at GO2 People’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. Check out our latest analysis for GO2 People

What is cash burn?

Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, GO2 People has AU$4.93M in cash holdings and producing negative cash flows from its day-to-day activities of -AU$1.70M. How fast GO2 People 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. GO2 People operates in the human resource and employment services industry, which on average generates a positive earnings per share, 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 Mar 22nd 18
ASX:GO2 Income Statement Mar 22nd 18

When will GO2 People need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for GO2 People 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. In the past year, opex (excluding one-offs) rose by 53.89%, which is considerably high. This means that, if GO2 People continues to grow its opex at this rate, given how much money it currently has in the bank, it will actually need to raise capital again in within the next 8 months! This is also the case if GO2 People maintains its opex level of AU$7.92M, without growth, going forward. Although this is a relatively simplistic calculation, and GO2 People may reduce its costs or raise debt capital instead of coming to equity markets, the analysis still helps us understand how sustainable the GO2 People’s operation is, and when things may have to change.

Next Steps:

This analysis isn’t meant to deter you from GO2 People, but rather, to help you better understand the risks involved investing in loss-making companies. 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. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next. I admit this is a fairly basic analysis for GO2’s financial health. Other important fundamentals need to be considered alongside. You should continue to research GO2 People to get a more holistic view of the company by looking at:
  1. Valuation: What is GO2 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GO2 is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on GO2 People’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 31 December 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.