What's The Outlook For Loss-Making Earth Alive Clean Technologies Inc (FRA:E11)?

As the €10.96M market cap Earth Alive Clean Technologies Inc (DB:E11) released another year of negative earnings, investors may be on edge waiting for breakeven. 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. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to come back to market for additional capital raising. This may not always be on their own terms, which could hurt current shareholders if the new deal lowers the value of their shares. Earth Alive Clean Technologies 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 our latest analysis for Earth Alive Clean Technologies

What is cash burn?

Earth Alive Clean Technologies’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 -CA$1.96M, Earth Alive Clean Technologies is chipping away at its CA$85.51K cash reserves in order to run its business. How fast Earth Alive Clean Technologies runs down its cash supply over time is known as the cash burn rate. 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. Earth Alive Clean Technologies operates in the specialty chemicals industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. Earth Alive Clean Technologies runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.

When will Earth Alive Clean Technologies need to raise more cash?

Earth Alive Clean Technologies 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. In the past year, opex (excluding one-offs) rose by 23.77%, which is considerably high. This means that, if Earth Alive Clean Technologies 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 within the next couple of months! Moreover, even if Earth Alive Clean Technologies kept its opex level at CA$2.64M, it will still have to come to market within the next year. Although this is a relatively simplistic calculation, and Earth Alive Clean Technologies may reduce its costs or raise debt capital instead of coming to equity markets, the 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:

The risks involved in investing in loss-making Earth Alive Clean Technologies means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. Now you know that if the company was to continue to grow its opex at a double-digit rate, it will not be able to sustain its operations given the current 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. I admit this is a fairly basic analysis for E11's financial health. Other important fundamentals need to be considered alongside. You should continue to research Earth Alive Clean Technologies to get a more holistic view of the company by looking at:

1. Historical Performance: What has E11'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 Earth Alive Clean Technologies’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 30 September 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.