Is This A Catalyst To Buy Jatenergy Limited (ASX:JAT)?

As the AU$84.28M market cap Jatenergy Limited (ASX:JAT) released another year of negative earnings, investors may be on edge waiting for breakeven. 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? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Jatenergy is spending more money than it earns, it will need to fund its expenses via external sources of capital. Jatenergy 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. Check out our latest analysis for Jatenergy

What is cash burn?

Jatenergy currently has AU$2.44M in the bank, with negative cash flows from operations of -AU$752.61K. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. How fast Jatenergy runs down its cash supply over time is known as the cash burn rate. The most significant threat facing investor is the company going out of business when it runs out of money and cannot raise any more capital. Jatenergy operates in the distributors industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Jatenergy 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:JAT Income Statement May 6th 18
ASX:JAT Income Statement May 6th 18

When will Jatenergy need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for Jatenergy 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. In Jatenergy’s case, its opex fell by 21.66% last year, which may signal the company moving towards a more sustainable level of expenses. If opex is maintained at the current level of AU$507.02K, then given the current level of cash in the bank, Jatenergy will not need to come to market any time within the next three years. Even though this is analysis is fairly basic, and Jatenergy still can cut its overhead further, or raise debt capital instead of coming to equity markets, the outcome of this analysis still helps us understand how sustainable the Jatenergy’s operation is, and when things may have to change.

Next Steps:

Jatenergy’s declining opex growth isn’t a good thing or a bad thing. It merely means the company will run down its cash reserves more slowly but also reinvest less in the business. Although we haven’t accounted for all possible expenses for the company, on a high level, we believe the company doesn’t have an immediate cash problem based on this cash burn analysis. Opex is only one side of the coin. I recommend also looking at revenues in order to forecast when the company will become breakeven and start producing profits for shareholders. This is only a rough assessment of financial health, and I’m sure JAT has company-specific issues impacting its cash management decisions. I recommend you continue to research Jatenergy to get a more holistic view of the company by looking at:
  1. Valuation: What is JAT 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 JAT 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 Jatenergy’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.