Trailing twelve-month data shows us that Gusbourne PLC’s (AIM:GUS) earnings loss has accumulated to -UK£1.65M. Although some investors expected this, their belief in the path to profitability for Gusbourne may be wavering. 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. 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 Gusbourne’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. 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 UK£3.14M in cash holdings and producing negative cash flows from its day-to-day activities of -UK£2.08M. The measure of how fast Gusbourne goes through its cash reserves over time is called 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. Gusbourne operates in the distillers and vintners industry, which delivered positive earnings 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?
Operational expenses, or opex for short, are the bare minimum expenses for Gusbourne 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 the past year, opex (excluding one-offs) rose by 25.00%, which is considerably high. My cash burn analysis suggests that Gusbourne has a cash runway of 1.9 years, given its current level of cash holdings. This may mean it will be coming to market sooner than shareholders would like. This is also the case if Gusbourne maintains its opex level of UK£1.45M, without growth, going forward. Although this is a relatively simplistic calculation, and Gusbourne may reduce its costs 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, especially those that are still growing its opex at a high rate. 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 a double-digit rate, it will not be able to sustain its operations given the current level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Gusbourne come to market to fund its growth. 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:
- 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.
- 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.
- 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.