Does LatAm Autos Limited (ASX:LAA) Need To Issue More Shares?

LatAm Autos Limited (ASX:LAA) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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. Selling new shares may dilute the value of existing shares on issue, and since LatAm Autos is currently burning more cash than it is making, it’s likely the business will need funding for future growth. LatAm Autos 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.

See our latest analysis for LatAm Autos

What is cash burn?

Currently, LatAm Autos has AU$6.6m in cash holdings and producing negative free cash flow of -AU$7.6m. The riskiest factor facing investors of LatAm Autos is the potential for the company to run out of cash without the ability to raise more money. LatAm Autos operates in the interactive media and services industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. LatAm Autos 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:LAA Income Statement, March 19th 2019
ASX:LAA Income Statement, March 19th 2019

When will LatAm Autos need to raise more cash?

When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much LatAm Autos has to spend each year in order to keep its business running.

Free cash outflows grew by 16% over the past year, up sharply on the prior year. This means that – given its current cash balance – if LatAm Autos continues to grow its cash burn at this rate, it may need to raise capital within the next 10.35 months! This is also the case if LatAm Autos maintains its cash burn rate of -AU$7.6m, without growth, going forward. Even though this is analysis is fairly basic, and LatAm Autos still can cut its overhead in the near future, or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the LatAm Autos operation is, and when things may have to change.

Next Steps:

Loss-making companies are riskier, especially those that are still growing its cash burn at a high rate. This doesn’t mean you should avoid a loss-making stock forever – but it’s something to be aware of. The cash burn analysis result indicates a cash constraint for the company, due to its high cash burn growth and its level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should LatAm Autos raise capital to fund its operations. Keep in mind I haven’t considered other factors such as how LAA is expected to perform in the future. I suggest you continue to research LatAm Autos to get a more holistic view of the company by looking at:
  1. Future Outlook: What are well-informed industry analysts predicting for LAA’s future growth? Take a look at our free research report of analyst consensus for LAA’s outlook.
  2. Valuation: What is LAA 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 LAA is currently mispriced by the market.
  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 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.