Tomizone Limited’s (ASX:TOM): From Cash To Ash?

Tomizone Limited (ASX:TOM) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Tomizone is spending more money than it earns, it will need to fund its expenses via external sources of capital. Tomizone 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. View out our latest analysis for Tomizone

What is cash burn?

With a negative operating cash flow of -AU$2.42m, Tomizone is chipping away at its AU$397.57k cash reserves in order to run its business. The riskiest factor facing investors of Tomizone is the potential for the company to run out of cash without the ability to raise more money. Tomizone operates in the internet software and services industry, which delivered positive earnings in the past year. This means, on average, its industry peers are profitable. Tomizone runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.

ASX:TOM Income Statement July 2nd 18
ASX:TOM Income Statement July 2nd 18

When will Tomizone need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for Tomizone 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 0.95%, which is relatively appropriate for a small-cap company. However, if Tomizone continues to grow its opex at this rate, given how much money it currently has in the bank, it will actually need to raise capital again in within the next 2.76 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. Although this is a relatively simplistic calculation, and Tomizone may reduce its costs or raise debt capital instead of coming to equity markets, 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 ramping up its opex. 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 current opex growth rate and its level of cash reserves. 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 TOM is expected to perform in the future. I recommend you continue to research Tomizone to get a more holistic view of the company by looking at:
  1. 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.
  2. 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.
  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.