Dilution Ahead For Tinybeans Group Limited (ASX:TNY) Shareholders?

Trailing twelve-month data shows us that Tinybeans Group Limited’s (ASX:TNY) earnings loss has accumulated to -AU$3.89M. Although some investors expected this, their belief in the path to profitability for Tinybeans Group may be wavering. 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 Tinybeans Group’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. View our latest analysis for Tinybeans Group

What is cash burn?

Tinybeans 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$3.42M, Tinybeans Group is chipping away at its AU$3.16M cash reserves in order to run its business. How fast Tinybeans Group runs down its cash supply over time is known as the cash burn rate. The most significant threat facing investor is the company going out of business when it runs out of money and cannot raise any more capital. Unprofitable companies operating in the exciting, fast-growing tech industry often face this problem, and Tinybeans Group is no exception. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or the risk of falling behind competition on innovation and gaining market share by investing too slowly.

ASX:TNY Income Statement Apr 30th 18
ASX:TNY Income Statement Apr 30th 18

When will Tinybeans Group need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for Tinybeans 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. Over the last twelve months, opex (excluding one-offs) increased by 25.00%, which is rather substantial. According to my analysis, if Tinybeans Group continues to grow at this rate, it will burn through its cash reserves by the next 1.7 years and may be coming to market again. Not the best news for shareholders. Though, if Tinybeans Group kept its opex level at AU$1.77M, it will still come to market within the next couple of years, but slightly later. Although this is a relatively simplistic calculation, and Tinybeans Group may reduce its costs or raise debt capital instead of coming to equity markets, the analysis still helps us understand how sustainable the Tinybeans Group’s operation is, and when things may have to change.

Next Steps:

The risks involved in investing in loss-making Tinybeans Group 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 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 Tinybeans Group come to market to fund its operations. Keep in mind I haven’t considered other factors such as how TNY is expected to perform in the future. You should continue to research Tinybeans Group to get a more holistic view of the company by looking at:
  1. Historical Performance: What has TNY’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 Tinybeans 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.