As the CA$95.39m market cap Nano One Materials Corp (CVE:NNO) 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? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Nano One Materials is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined Nano One Materials’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 Nano One Materials
What is cash burn?
With a negative operating cash flow of -CA$1.67m, Nano One Materials is chipping away at its CA$4.32m cash reserves in order to run its business. The biggest threat facing Nano One Materials’s investor is the company going out of business when it runs out of money and cannot raise any more capital. Nano One Materials operates in the specialty chemicals industry, which delivered positive earnings in the past year. This means, on average, its industry peers are profitable. Nano One Materials runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will Nano One Materials need to raise more cash?
Opex, or operational expenses, are the necessary costs Nano One Materials 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. Over the last twelve months, opex (excluding one-offs) increased by 25.00%, which is rather substantial. My cash burn analysis suggests that Nano One Materials has a cash runway of 1.5 years, given its current level of cash holdings. This may mean it will be coming to market sooner than shareholders would like. Though, if Nano One Materials kept its opex level at CA$2.76m, it will still come to market within the next couple of years, but slightly later. Even though this is analysis is fairly basic, and Nano One Materials still can cut its overhead in the near future, or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the Nano One Materials’s operation is, and when things may have to change.
Next Steps:This analysis isn’t meant to deter you from Nano One Materials, but rather, to help you better understand the risks involved investing in loss-making companies. 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 Nano One Materials come to market to fund its growth. This is only a rough assessment of financial health, and I’m sure NNO has company-specific issues impacting its cash management decisions. I recommend you continue to research Nano One Materials to get a better picture of the company by looking at:
- Historical Performance: What has NNO’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 Nano One Materials’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.