ECSC Group plc’s (LON:ECSC) Single Biggest Risk For Investors

Trailing twelve-month data shows us that ECSC Group plc’s (AIM:ECSC) earnings loss has accumulated to -UK£3.41M. Although some investors expected this, their belief in the path to profitability for ECSC Group may be wavering. The single most important question to ask when you’re investing in a loss-making company is – will they need to raise cash again, and if so, when? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that ECSC Group is spending more money than it earns, it will need to fund its expenses via external sources of capital. ECSC 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. Check out our latest analysis for ECSC Group

What is cash burn?

ECSC Group currently has UK£1.60M in the bank, with negative cash flows from operations of -UK£3.06M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. How fast ECSC Group runs down its cash supply over time is known as the cash burn rate. The most significant threat facing investor is the company going out of business when it runs out of money and cannot raise any more capital. Unprofitable companies operating in the exciting, fast-growing tech industry often face this problem, and ECSC Group is no exception. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or the risk of falling behind competition on innovation and gaining market share by investing too slowly.

AIM:ECSC Income Statement Apr 6th 18
AIM:ECSC Income Statement Apr 6th 18

When will ECSC Group need to raise more cash?

ECSC Group has to pay its employees and other necessities such as rent and admin costs in order to keep its business running. These costs are called operational expenses, which is sometimes shortened to opex. In this calculation I’ve only included recurring sales, general and admin (SG&A) expenses, and R&D expenses occured within they year. In the past year, opex (excluding one-offs) rose by 27.14%, which is considerably high. Not surprisingly, if ECSC 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 ECSC Group kept its opex level at UK£5.33M, it will still have to come to market within the next year. Even though this is analysis is fairly basic, and ECSC Group still can cut its overhead in the near future, 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:

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. The cash burn analysis result indicates a cash constraint for the company, due to its high opex growth and its level of cash reserves. 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. I admit this is a fairly basic analysis for ECSC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research ECSC Group to get a more holistic view of the company by looking at:
  1. Historical Performance: What has ECSC’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 ECSC Group’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.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.