Trailing twelve-month data shows us that CoAssets Limited’s (ASX:CA8) earnings loss has accumulated to -S$495.77K. Although some investors expected this, their belief in the path to profitability for CoAssets may be wavering. 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. 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. Today I’ve examined CoAssets’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. Check out our latest analysis for CoAssets
What is cash burn?
CoAssets’s expenses are currently higher than the money it makes from its day-to-day operations, which means it is funding its overhead with equity capital a.k.a. its cash. With a negative operating cash flow of -S$4.64M, CoAssets is chipping away at its S$4.00M cash reserves in order to run its business. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Furthermore, it is not uncommon to find loss-makers in an industry such as tech. The industry is highly competitive, with companies racing to invest in innovation at the risk of burning through its cash too fast.
When will CoAssets need to raise more cash?
Opex, or operational expenses, are the necessary costs CoAssets must pay to keep the business running every day. For the purpose of this calculation I’ve only accounted for sales, general and admin (SG&A) expenses, and R&D expenses incurred within this year. Opex declined by 25.00% over the past year, which could be an indication of CoAssets putting the brakes on ramping up high growth. If CoAssets kept its opex level at S$461.25K, it may not need to raise capital for another couple of years. Even though this is analysis is fairly basic, and CoAssets 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 CoAssets’s operation is, and when things may have to change.
Next Steps:Investors shouldn’t expect CoAssets to come to market anytime soon, according to the outcome of our analysis. 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. In addition to this analysis, I suggest you take a look at their expected revenue growth to determine the timing of future profitability as well. Keep in mind I haven’t considered other factors such as how CA8 is expected to perform in the future. I suggest you continue to research CoAssets to get a better picture of the company by looking at:
- Historical Performance: What has CA8’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 CoAssets’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.