What’s The Outlook For Loss-Making Alpha Peak Leisure Inc (CVE:AAP)?

Alpha Peak Leisure Inc (TSXV:AAP) 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. Additional cash raising may dilute the value of your shares, and since Alpha Peak Leisure is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Alpha Peak Leisure’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. See our latest analysis for Alpha Peak Leisure

What is cash burn?

Alpha Peak Leisure currently has CA$5.00M in the bank, with negative cash flows from operations of -CA$3.45M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. How fast Alpha Peak Leisure runs down its cash supply over time is known as 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. Alpha Peak Leisure operates in the hotels, resorts and cruise lines industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. Alpha Peak Leisure runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.

TSXV:AAP Income Statement May 15th 18
TSXV:AAP Income Statement May 15th 18

When will Alpha Peak Leisure need to raise more cash?

Alpha Peak Leisure 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. Over the last twelve months, opex (excluding one-offs) increased by 22.90%, which is rather substantial. My cash burn analysis suggests that Alpha Peak Leisure has a cash runway of 1.2 years, given its current level of cash holdings. This may mean it will be coming to market sooner than shareholders would like. Though, if Alpha Peak Leisure kept its opex level at CA$4.16M, it will still come to market within the next couple of years, but slightly later. Although this is a relatively simplistic calculation, and Alpha Peak Leisure 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. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Alpha Peak Leisure come to market to fund its growth. Keep in mind I haven’t considered other factors such as how AAP is expected to perform in the future. I recommend you continue to research Alpha Peak Leisure to get a better picture of the company by looking at:
  1. Historical Performance: What has AAP’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 Alpha Peak Leisure’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.