Will You Be Burnt By CYCLIQ Group Limited’s (ASX:CYQ) Cash Burn?

Trailing twelve-month data shows us that CYCLIQ Group Limited’s (ASX:CYQ) earnings loss has accumulated to -AU$4.31M. Although some investors expected this, their belief in the path to profitability for CYCLIQ Group 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that CYCLIQ Group is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at CYCLIQ Group’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 CYCLIQ Group

What is cash burn?

CYCLIQ 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$3.38M, CYCLIQ Group is chipping away at its AU$910.11K cash reserves in order to run its business. The measure of how fast CYCLIQ 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. CYCLIQ Group operates in the leisure products industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. CYCLIQ 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:CYQ Income Statement May 1st 18
ASX:CYQ Income Statement May 1st 18

When will CYCLIQ Group need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for CYCLIQ 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. Opex (excluding one-offs) grew by 25.00% over the past year, which is considerably high. My cash burn analysis suggests that, if CYCLIQ Group continues to spend its cash reserves at this current high rate, it’ll have to raise capital within the next 3 months, which may be a surprise to some shareholders. Moreover, even if CYCLIQ Group kept its opex level at AU$4.51M, it will still have to come to market within the next year. Although this is a relatively simplistic calculation, and CYCLIQ Group 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 CYCLIQ Group’s operation is, and when things may have to change.

Next Steps:

The risks involved in investing in loss-making CYCLIQ 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. The cash burn analysis result indicates a cash constraint for the company, due to its high opex growth and its level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should CYCLIQ Group come to market to fund its growth. I admit this is a fairly basic analysis for CYQ’s financial health. Other important fundamentals need to be considered alongside. You should continue to research CYCLIQ Group to get a better picture of the company by looking at:
  1. Historical Performance: What has CYQ’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 CYCLIQ 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.