The Native SA (SWX:FEL) 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 Native is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Native’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. Check out our latest analysis for Native
What is cash burn?
Native currently has CHF2.04M in the bank, with negative cash flows from operations of -CHF331.00K. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. The measure of how fast Native 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. Unprofitable companies operating in the exciting, fast-growing tech industry often face this problem, and Native is no exception. The industry is highly competitive, with companies racing to invest in innovation at the risk of burning through its cash too fast.
When will Native need to raise more cash?
Opex, or operational expenses, are the necessary costs Native 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 8.99% over the past year, which is fairly normal for a small-cap. According to my analysis, if Native continues to grow at this rate, it will burn through its cash reserves by the next 2.1 years, and may be coming to market again. Not the best news for shareholders. Furthermore, even if Native kept its opex level at the current CHF915.00K, it will still be coming to market in about 2.2 years. Even though this is analysis is fairly basic, and Native still can cut its overhead in the near future, or raise debt capital instead of coming to equity markets, the analysis still helps us understand how sustainable the Native’s operation is, and when things may have to change.
Next Steps:The risks involved in investing in loss-making Native 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 outcome of my analysis suggests that if the company maintains the rate of opex growth, it will run out of cash in the upcoming years. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Native come to market to fund its growth. This is only a rough assessment of financial health, and I’m sure FEL has company-specific issues impacting its cash management decisions. I recommend you continue to research Native to get a more holistic view of the company by looking at:
- Valuation: What is FEL worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether FEL is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Native’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.