As the £25.00M market cap Gusbourne PLC (AIM:GUS) 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 Gusbourne is spending more money than it earns, it will need to fund its expenses via external sources of capital. Gusbourne 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. Check out our latest analysis for Gusbourne
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, Gusbourne has £3.14M in cash holdings and producing negative cash flows from its day-to-day activities of -£2.09M. The measure of how fast Gusbourne goes through its cash reserves over time is called the cash burn rate. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Gusbourne operates in the distillers and vintners industry, which delivered a positive EPS of £1.02 in the past year. This means, on average, its industry peers operating are profitable. Gusbourne runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will Gusbourne need to raise more cash?
Opex, or operational expenses, are the necessary costs Gusbourne 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 28.10% over the past year, which is rather substantial. This means that, if Gusbourne continues to grow its opex at this rate, given how much money it currently has in the bank, it will need to raise capital again in 2 years. Furthermore, even if Gusbourne kept its opex level at the current £1.45M, it will still be coming to market in about 2.2 years. Even though this is analysis is fairly basic, and Gusbourne still can cut its overhead in the near future, or raise debt capital instead of coming to equity markets, the analysis still helps us understand how sustainable the Gusbourne’s operation is, and when things may have to change.
What this means for you:This analysis isn’t meant to deter you from Gusbourne, but rather, to help you better understand the risks involved investing in loss-making companies. The outcome of my analysis suggests that if the company maintains the rate of opex growth, it will run out of cash in the upcoming years. 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 GUS is expected to perform in the future. I recommend you continue to research Gusbourne to get a better picture of the company by looking at:
- 1. Historical Performance: What has GUS’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 Gusbourne’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.