As the AU$5.71M market cap Tomizone Limited (ASX:TOM) released another year of negative earnings, investors may be on edge waiting for breakeven. The single most important question to ask when you’re investing in a loss-making company is – will they need to raise cash again, and if so, when? Additional cash raising may dilute the value of your shares, and since Tomizone is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Tomizone’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. View our latest analysis for Tomizone
What is cash burn?
Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, Tomizone has AU$397.57K in cash holdings and producing negative cash flows from its day-to-day activities of -AU$2.42M. The measure of how fast Tomizone goes through its cash reserves over time is called the cash burn rate. The riskiest factor facing investors of the company is the potential for the company to run out of cash without the ability to raise more money, i.e. the company goes out of business. Not surprisingly, it is more common to find unprofitable companies in the high-growth tech industry. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.
When will Tomizone need to raise more cash?
Opex, or operational expenses, are the necessary costs Tomizone 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 (excluding one-offs) grew by 0.95% over the past year, which is relatively reasonable for a small-cap company. Though, if opex continues to rise at this rate, given how much cash reserves Tomizone currently has, it will actually need to raise capital again within the next couple of months! Moreover, even if Tomizone kept its opex level at AU$1.73M, it will still have to come to market within the next year. Even though this is analysis is fairly basic, and Tomizone still can cut its overhead in the near future, 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 Tomizone’s operation is, and when things may have to change.
Next Steps:The risks involved in investing in loss-making Tomizone 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 current opex growth rate and its level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Tomizone come to market to fund its growth. Keep in mind I haven’t considered other factors such as how TOM is expected to perform in the future. I recommend you continue to research Tomizone to get a better picture of the company by looking at:
- Historical Performance: What has TOM’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 Tomizone’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.