Will You Be Burnt By 7digital Group plc's (LON:7DIG) Cash Burn?

As the UK£19.35M market cap 7digital Group plc (AIM:7DIG) released another year of negative earnings, investors may be on edge waiting for breakeven. 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that 7digital Group is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined 7digital Group’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 7digital Group

What is cash burn?

7digital Group’s expenses are currently higher than the money it makes from its day-to-day operations, which means it is funding its overhead with equity capital a.k.a. its cash. With a negative operating cash flow of -UK£2.12M, 7digital Group is chipping away at its UK£910.00K cash reserves in order to run its business. The measure of how fast 7digital Group 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. 7digital Group operates in the broadcasting industry, which has an average EPS of UK£0.61, meaning the majority of its peers are profitable. 7digital Group faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.

When will 7digital Group need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for 7digital Group 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 (excluding one-offs) grew by 11.19% over the past year, which is fairly normal for a small-cap. Not surprisingly, if 7digital Group continues to ramp up expenditure at this rate for the upcoming year, it’ll likely need to come to market within the next few months, given the its current level of cash reserves. Moreover, even if 7digital Group kept its opex level at UK£13.82M, it will still have to come to market within the next year. Even though this is analysis is fairly basic, and 7digital Group still can cut its overhead in the near future, or raise debt capital instead of coming to equity markets, 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:

This analysis isn’t meant to deter you from 7digital Group, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its high opex growth and its level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should 7digital Group come to market to fund its operations. I admit this is a fairly basic analysis for 7DIG's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research 7digital Group to get a more holistic view of the company by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for 7DIG’s future growth? Take a look at our free research report of analyst consensus for 7DIG’s outlook.
• 2. Valuation: What is 7DIG 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 7DIG 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 30 June 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.