As the €4.90M market cap aovo Touristik AG (MUN:A8N) released another year of negative earnings, investors may be on edge waiting for breakeven. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Additional cash raising may dilute the value of your shares, and since aovo Touristik is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined aovo Touristik’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 aovo Touristik
What is cash burn?
aovo Touristik’s expenses are currently higher than the money it makes from its day-to-day operations, which means it is funding its overhead with equity capital a.k.a. its cash. With a negative operating cash flow of -€885.70K, aovo Touristik is chipping away at its €2.01M cash reserves in order to run its business. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. The most significant threat facing investor is the company going out of business when it runs out of money and cannot raise any more capital. aovo Touristik 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. aovo Touristik runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will aovo Touristik need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for aovo Touristik 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 1.95%, which is relatively appropriate for a small-cap company. Though, if opex continues to rise at this rate, given how much cash reserves aovo Touristik currently has, it will actually need to raise capital again within the next couple of months! This is also the case if aovo Touristik maintains its opex level of €3.37M, without growth, going forward. Although this is a relatively simplistic calculation, and aovo Touristik may reduce its costs or raise debt capital instead of coming to equity markets, the analysis still helps us understand how sustainable the aovo Touristik’s operation is, and when things may have to change.
Next Steps:The risks involved in investing in loss-making aovo Touristik 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 within the year. 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. This is only a rough assessment of financial health, and I’m sure A8N has company-specific issues impacting its cash management decisions. I suggest you continue to research aovo Touristik to get a more holistic view of the company by looking at:
- Historical Performance: What has A8N’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 aovo Touristik’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.