Trailing twelve-month data shows us that Thred Limited’s (ASX:THD) earnings loss has accumulated to -AU$6.08m. Although some investors expected this, their belief in the path to profitability for Thred 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. Additional cash raising may dilute the value of your shares, and since Thred is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Thred’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 Thred
What is cash burn?
Thred currently has AU$3.30m in the bank, with negative cash flows from operations of -AU$4.36m. The biggest threat facing Thred’s investor is the company going out of business when it runs out of money and cannot raise any more capital. Thred operates in the application software industry, which delivered positive earnings in the past year. This means, on average, its industry peers are profitable. Thred runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will Thred need to raise more cash?
Thred has to pay its employees and other necessities such as rent and admin costs in order to keep its business running. These costs are called operational expenses, which is sometimes shortened to opex. In this calculation I’ve only included recurring sales, general and admin (SG&A) expenses, and R&D expenses occured within they year. Opex declined by 25.00% over the past year, which could be an indication of Thred putting the brakes on ramping up high growth. However, even if Thred maintains its opex at the current level of AU$3.25m, then given the current level of cash in the bank, Thred will still have to come to market again in 1 years. Although this is a relatively simplistic calculation, and Thred may continue to reduce its costs 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 Thred’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 if the company maintains this negative rate of opex growth, it will run out of cash in the upcoming years. An opportunity may exist for you to enter into the stock at an attractive price, should Thred come to market to fund its operations. This is only a rough assessment of financial health, and I’m sure THD has company-specific issues impacting its cash management decisions. I recommend you continue to research Thred to get a better picture of the company by looking at:
- Historical Performance: What has THD’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 Thred’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.