LatAm Autos Limited (ASX:LAA) 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 it need to raise cash again, and if so, when? 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.
What is cash burn?
With a negative free cash flow of -AU$7.6m, LatAm Autos is chipping away at its AU$6.6m cash reserves in order to run its business. 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 delivered positive earnings in the past year. This means, on average, its industry peers are profitable. LatAm Autos runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
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, which is substantial. Not surprisingly, if LatAm Autos continues to ramp up expenditure at this rate for the upcoming year, it’ll likely need to raise capital within the next few months, given its current level of cash reserves. 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, the outcome of this 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 LatAm Autos, 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 cash burn 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 LAA’s financial health. Other important fundamentals need to be considered as well. I recommend you continue to research LatAm Autos to get a better picture of the company by looking at:
- 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.
- 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.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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.