Stock Analysis

When Will Loss-Maker Duro Felguera SA. (BME:MDF) Need More Cash?

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Trailing twelve-month data shows us that Duro Felguera SA.'s (BME:MDF) earnings loss has accumulated to -€254.50M. Although some investors expected this, their belief in the path to profitability for Duro Felguera may be wavering. 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? 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. Looking at Duro Felguera’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. See our latest analysis for Duro Felguera

What is cash burn?

Duro Felguera currently has €90.58M in the bank, with negative cash flows from operations of -€37.46M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Duro Felguera operates in the construction and engineering industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. Duro Felguera runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.

BME:MDF Income Statement May 14th 18
BME:MDF Income Statement May 14th 18

When will Duro Felguera need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for Duro Felguera 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. In Duro Felguera’s case, its opex fell by 4.68% last year, which may signal the company moving towards a more sustainable level of expenses. However, even with declining costs, the current level of cash is not enough to sustain Duro Felguera’s operations and the company may need to come to market to raise more capital within the year. Even though this is analysis is fairly basic, and Duro Felguera still can cut its overhead further, or open a new line of credit instead of issuing new equity shares, 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:

Loss-making companies are a risky play, even those that are reducing their opex over time. Though, this shouldn’t discourage you from considering entering the stock in the future. The outcome of my analysis suggests that even if the company maintains this negative 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. Keep in mind I haven't considered other factors such as how MDF is expected to perform in the future. I recommend you continue to research Duro Felguera to get a better picture of the company by looking at:
  1. Future Outlook: What are well-informed industry analysts predicting for MDF’s future growth? Take a look at our free research report of analyst consensus for MDF’s outlook.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Duro Felguera’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.

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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.