Dilution Ahead For NFON AG (FRA:NFN) Shareholders?

NFON AG (DB:NFN) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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 NFON is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined NFON’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. See our latest analysis for NFON

What is cash burn?

NFON currently has €2.18M in the bank, with negative cash flows from operations of -€341.00K. 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 NFON 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. NFON operates in the alternative carriers industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. NFON runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.

DB:NFN Income Statement May 25th 18
DB:NFN Income Statement May 25th 18

When will NFON need to raise more cash?

Opex, or operational expenses, are the necessary costs NFON 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 2.74% over the past year, which is relatively reasonable for a small-cap company. But, if NFON continues to ramp up its opex at this rate, given how much money it currently has in the bank, it will actually need to come to market again within the next year. This is also the case if NFON maintains its opex level of €4.51M, without growth, going forward. Even though this is analysis is fairly basic, and NFON 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 NFON’s operation is, and when things may have to change.

Next Steps:

Loss-making companies are a risky play, especially those that are still ramping up its opex. Though, this shouldn’t discourage you from considering entering the stock in the future. Now you know that if the company was to continue to grow its opex at this 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. This is only a rough assessment of financial health, and I’m sure NFN has company-specific issues impacting its cash management decisions. I suggest you continue to research NFON to get a better picture of the company by looking at:
  1. Historical Performance: What has NFN’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 NFON’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.