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As the UK£146m market cap Nanoco Group plc (LON:NANO) 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. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Nanoco Group 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.
What is cash burn?
With a negative free cash flow of -UK£3.3m, Nanoco Group is chipping away at its UK£11m cash reserves in order to run its business. The riskiest factor facing investors of Nanoco Group is the potential for the company to run out of cash without the ability to raise more money. Nanoco Group operates in the semiconductors industry, which delivered positive earnings in the past year. This means, on average, its industry peers are profitable. Nanoco Group runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will Nanoco Group need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Nanoco Group has to spend each year in order to keep its business running.
In the past year, free cash outflows (excluding one-offs) rose by 18%, which is high. However, given the current levels of cash holdings, it seems that Nanoco Group will not need further capital soon. The company may be able to continue investing at the same rate without having to issue equity or borrow within the next three years. Even though this is analysis is fairly basic, and Nanoco Group still can cut its overhead in the near future, or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Nanoco Group operation is, and when things may have to change.
Next Steps:It seems like Nanoco Group will not need to raise capital anytime soon, even if its strong operational expense continues to grow over the next couple of years. This should be good news for current shareholders as there is less of a chance that their current shares will be diluted, and it also indicates the company doesn’t have an immediate cash problem on its hand. Now that we’ve accounted for cash burn growth, you should also look at expected revenue growth in order to gauge when the company may become breakeven. I admit this is a fairly basic analysis for NANO’s financial health. Other important fundamentals need to be considered as well. I recommend you continue to research Nanoco Group to get a better picture of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NANO’s future growth? Take a look at our free research report of analyst consensus for NANO’s outlook.
- Valuation: What is NANO 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 NANO is currently mispriced by the market.
- 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 July 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.