Should You Sell Qt Group Oyj (HEL:QTCOM) For This Reason?

Qt Group Oyj (HLSE:QTCOM) 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. 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. Today I’ve examined Qt Group Oyj’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 Qt Group Oyj

What is cash burn?

Qt Group Oyj currently has €11.69M in the bank, with negative cash flows from operations of -€2.94M. 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. Not surprisingly, it is more common to find unprofitable companies in the high-growth tech industry. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.

HLSE:QTCOM Income Statement Apr 5th 18
HLSE:QTCOM Income Statement Apr 5th 18

When will Qt Group Oyj need to raise more cash?

Opex, or operational expenses, are the necessary costs Qt Group Oyj 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 43.53% over the past year, which is rather substantial. My cash burn analysis suggests that Qt Group Oyj has a cash runway of 2.5 years, given its current level of cash holdings. This may mean it will be coming to market sooner than shareholders would like. Furthermore, even if Qt Group Oyj kept its opex level at the current €3.99M, it will still be coming to market in about 2.9 years. Although this is a relatively simplistic calculation, and Qt Group Oyj may reduce its costs or open a new line of credit instead of issuing new equity shares, the outcome of this 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:

This analysis isn’t meant to deter you from Qt Group Oyj, but rather, to help you better understand the risks involved investing in loss-making companies. 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 QTCOM’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Qt Group Oyj to get a more holistic view of the company by looking at:
  1. Future Outlook: What are well-informed industry analysts predicting for QTCOM’s future growth? Take a look at our free research report of analyst consensus for QTCOM’s outlook.
  2. Valuation: What is QTCOM 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 QTCOM is currently mispriced by the market.
  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.