Trailing twelve-month data shows us that Adslot Limited’s (ASX:ADJ) earnings loss has accumulated to -AU$10.0m. Although some investors expected this, their belief in the path to profitability for Adslot may be wavering. 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 Adslot is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Adslot’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
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What is cash burn?
With a negative free cash flow of -AU$8.5m, Adslot is chipping away at its AU$4.8m cash reserves in order to run its business. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Unprofitable companies operating in the fast-growing tech industry often face this problem, and Adslot is no exception. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or falling behind competition on innovation and gaining market share by investing too slowly.
When will Adslot need to raise more cash?
We can measure Adslot’s ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
In Adslot’s case, its cash outflows fell by 24% last year, which may signal the company moving towards a more sustainable level of expenses. Given the level of cash left in the bank, if Adslot maintained its cash burn rate of -AU$8.5m, it could still run out of cash within the next few of months. Even though this is analysis is fairly basic, and Adslot still can cut its overhead further, or borrow money instead of raising new equity capital, this analysis still helps us understand how sustainable the Adslot operation is, and when things may have to change.
Next Steps:The risks involved in investing in loss-making Adslot 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 current level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should Adslot be required to raise new funds to continue operating. This is only a rough assessment of financial health, and ADJ likely also has company-specific issues impacting its cash management decisions. I suggest you continue to research Adslot to get a better picture of the company by looking at:
- Historical Performance: What has ADJ’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.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Adslot’s board and the CEO’s back ground.
- 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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