Trailing twelve-month data shows us that Earthport plc’s (AIM:EPO) earnings loss has accumulated to -UK£14.00M. Although some investors expected this, their belief in the path to profitability for Earthport 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Earthport is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined Earthport’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 Earthport
What is cash burn?
Earthport’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£4.56M, Earthport is chipping away at its UK£30.63M cash reserves in order to run its business. How fast Earthport 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. Not surprisingly, it is more common to find unprofitable companies in the high-growth tech industry. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.
When will Earthport need to raise more cash?
Opex, or operational expenses, are the necessary costs Earthport 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. In the past year, opex (excluding one-offs) rose by 19.49%, which is rather substantial. My cash burn analysis suggests that Earthport has a cash runway of 1 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 Earthport maintains its opex level of UK£29.34M, without growth, going forward. Even though this is analysis is fairly basic, and Earthport still can cut its overhead in the near future, 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:The risks involved in investing in loss-making Earthport means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. 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. This is only a rough assessment of financial health, and I’m sure EPO has company-specific issues impacting its cash management decisions. I recommend you continue to research Earthport to get a better picture of the company by looking at:
- Valuation: What is EPO 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 EPO is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Earthport’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.