Should You Wait Before Investing In Northamber plc (LON:NAR)?

Northamber plc (AIM:NAR) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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. Additional cash raising may dilute the value of your shares, and since Northamber is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Northamber’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. View our latest analysis for Northamber

What is cash burn?

Northamber’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£1.89M, Northamber is chipping away at its UK£2.25M cash reserves in order to run its business. The measure of how fast Northamber goes through its cash reserves over time is called 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. Furthermore, it is not uncommon to find loss-makers in an industry such as tech. The industry is highly competitive, with companies racing to invest in innovation at the risk of burning through its cash too fast.

AIM:NAR Income Statement Apr 10th 18
AIM:NAR Income Statement Apr 10th 18

When will Northamber need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for Northamber 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 Northamber’s case, its opex fell by 3.78% last year, which may signal the company moving towards a more sustainable level of expenses. However, this cost-reduction initiative is still not enough. Given the level of cash left in the bank, if Northamber maintained its opex level of UK£5.28M, it will still run out of cash within the next couples of months. Although this is a relatively simplistic calculation, and Northamber may continue to reduce its costs further or open a new line of credit instead of issuing new equity shares, 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:

This analysis isn’t meant to deter you from Northamber, but rather, to help you better understand the risks involved investing in loss-making companies. Now you know that even if the company was to continue to shrink its opex at this rate, it will not be able to sustain its operations given the current 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. Keep in mind I haven’t considered other factors such as how NAR is expected to perform in the future. I suggest you continue to research Northamber to get a more holistic view of the company by looking at:
  1. Historical Performance: What has NAR’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 Northamber’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.