Invigor Group Limited’s (ASX:IVO): From Cash To Ash?

As the AU$8.39M market cap Invigor Group Limited (ASX:IVO) released another year of negative earnings, investors may be on edge waiting for breakeven. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. 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. Looking at Invigor Group’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. See our latest analysis for Invigor Group

What is cash burn?

Invigor Group’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 -AU$5.01M, Invigor Group is chipping away at its AU$511.00K cash reserves in order to run its business. The measure of how fast Invigor Group goes through its cash reserves over time is called the cash burn rate. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Not surprisingly, it is more common to find unprofitable companies in the high-growth tech industry. The industry is highly competitive, with companies racing to invest in innovation at the risk of burning through its cash too fast.

ASX:IVO Income Statement Apr 7th 18
ASX:IVO Income Statement Apr 7th 18

When will Invigor Group need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for Invigor Group 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. Opex declined by 3.17% over the past year, which could be an indication of Invigor Group putting the brakes on ramping up high growth. However, this cost-reduction initiative is still not enough. Given the level of cash left in the bank, if Invigor Group maintained its opex level of AU$1.22M, it will still run out of cash within the next couples of months. Even though this is analysis is fairly basic, and Invigor Group still can cut its overhead further, or open a new line of credit instead of issuing new equity shares, the outcome of this analysis still helps us understand how sustainable the Invigor Group’s operation is, and when things may have to change.

Next Steps:

Loss-making companies are a risky play, even those that are reducing their opex over time. Though, this shouldn’t discourage you from considering entering the stock in the future. The outcome of my analysis suggests that even if the company maintains this negative rate of opex growth, it will run out of cash within the year. 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. Keep in mind I haven’t considered other factors such as how IVO is expected to perform in the future. I suggest you continue to research Invigor Group to get a better picture of the company by looking at:
  1. Historical Performance: What has IVO’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.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Invigor Group’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.