As the UK£5.66M market cap Norman Broadbent Plc (AIM:NBB) 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Norman Broadbent is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined Norman Broadbent’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 Norman Broadbent
What is cash burn?
Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, Norman Broadbent has UK£678.00K in cash holdings and producing negative cash flows from its day-to-day activities of -UK£2.08M. How fast Norman Broadbent 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. Norman Broadbent operates in the human resource and employment services industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. Norman Broadbent runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will Norman Broadbent need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for Norman Broadbent 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. Opex declined by 5.72% over the past year, which could be an indication of Norman Broadbent putting the brakes on ramping up high growth. However, this cost-reduction initiative is still not enough. Given the level of cash left in the bank, if Norman Broadbent maintained its opex level of UK£6.60M, it will still run out of cash within the next couples of months. Although this is a relatively simplistic calculation, and Norman Broadbent may continue to reduce its costs further or raise debt capital instead of coming to equity markets, 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 Norman Broadbent, but rather, to help you better understand the risks involved investing in loss-making companies. 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. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Norman Broadbent come to market to fund its growth. Keep in mind I haven’t considered other factors such as how NBB is expected to perform in the future. You should continue to research Norman Broadbent to get a better picture of the company by looking at:- Historical Performance: What has NBB’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 Norman Broadbent’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.