As the AU$6.46m market cap MSM Corporation International Limited (ASX:MSM) 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. Additional cash raising may dilute the value of your shares, and since MSM International is currently burning more cash than it is making, it’s likely the business will need funding for future growth. MSM International 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 MSM International
What is cash burn?
MSM International currently has AU$1.43m in the bank, with negative cash flows from operations of -AU$17.32m. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. MSM International operates in the application software industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. MSM International 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.
When will MSM International need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for MSM International 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. Over the last twelve months, opex (excluding one-offs) increased by 25.00%, which is considerably high. Not surprisingly, if MSM International continues to ramp up expenditure at this rate for the upcoming year, it’ll likely need to come to market within the next few months, given the its current level of cash reserves. Moreover, even if MSM International kept its opex level at AU$7.11m, it will still have to come to market within the next year. Although this is a relatively simplistic calculation, and MSM International may reduce its costs or open a new line of credit instead of issuing new equity 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:Loss-making companies are a risky play, especially those that are still growing its opex at a high rate. Though, this shouldn’t discourage you from considering entering the stock in the future. The cash burn analysis result indicates a cash constraint for the company, due to its high opex growth and its level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should MSM International come to market to fund its operations. Keep in mind I haven’t considered other factors such as how MSM is expected to perform in the future. You should continue to research MSM International to get a more holistic view of the company by looking at:
- Historical Performance: What has MSM’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 MSM International’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.