How Long Will Loss-Making Alexium International Group Limited (ASX:AJX) Survive?

Alexium International Group Limited (ASX:AJX) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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. 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. Alexium International Group 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 Alexium International Group

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, Alexium International Group has AU$17.27M in cash holdings and producing negative cash flows from its day-to-day activities of -AU$10.94M. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. 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. Alexium International Group operates in the diversified chemicals industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Alexium International 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:AJX Income Statement Mar 30th 18
ASX:AJX Income Statement Mar 30th 18

When will Alexium International Group need to raise more cash?

Alexium International Group 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. Over the last twelve months, opex (excluding one-offs) increased by 36.32%, which is considerably high. This means that, if Alexium International Group continues to grow its opex at this rate, given how much money it currently has in the bank, it will need to raise capital again in 1.8 years. Furthermore, even if Alexium International Group kept its opex level at the current AU$9.14M, it will still be coming to market in about 1.9 years. Although this is a relatively simplistic calculation, and Alexium International Group may reduce its costs or raise debt capital instead of coming to equity markets, the 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.

Next Steps:

This analysis isn’t meant to deter you from Alexium International Group, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its high opex growth and its 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 AJX’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Alexium International Group to get a more holistic view of the company by looking at:
  1. Historical Performance: What has AJX’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 Alexium International 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.