When Will YPB Group Limited (ASX:YPB) Run Out Of Money?

YPB Group Limited (ASX:YPB) 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 YPB Group is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at YPB Group’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. See our latest analysis for YPB Group

What is cash burn?

YPB Group’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 -AU$7.74M, YPB Group is chipping away at its AU$845.00K cash reserves in order to run its business. The measure of how fast YPB Group goes through its cash reserves over time is called the cash burn rate. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. YPB Group operates in the research and consulting services industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. YPB Group 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:YPB Income Statement Apr 5th 18
ASX:YPB Income Statement Apr 5th 18

When will YPB Group need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for YPB Group 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 26.52%, which is rather substantial. This means that, if YPB Group 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 within the next couple of months! Moreover, even if YPB Group kept its opex level at AU$7.59M, it will still have to come to market within the next year. Although this is a relatively simplistic calculation, and YPB Group may reduce its costs or raise debt capital instead of coming to equity markets, the outcome of this analysis still helps us understand how sustainable the YPB Group’s operation is, and when things may have to change.

Next Steps:

The risks involved in investing in loss-making YPB Group means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. 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. This is only a rough assessment of financial health, and I’m sure YPB has company-specific issues impacting its cash management decisions. I recommend you continue to research YPB Group to get a more holistic view of the company by looking at:
  1. Valuation: What is YPB 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 YPB 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 YPB Group’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.