In the most recent twelve months, Northamber plc’s (AIM:NAR) earnings loss has accumulated to -£1.00M. Although some investors expected this, their belief in the path to profitability for Northamber 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 Northamber is spending more money than it earns, it will need to fund its expenses via external sources of capital. Northamber 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. See our latest analysis for Northamber
What is cash burn?
Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, Northamber has £4.97M in cash holdings and producing negative cash flows from its day-to-day activities of -£0.30M. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Not surprisingly, it is more common to find unprofitable companies in the high-growth tech industry. The industry is highly competitive, with companies racing to invest in innovation at the risk of burning through its cash too fast.
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 5.02% 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 £5.44M, it will still run out of cash within the next couples of months. Even though this is analysis is fairly basic, and Northamber still can cut its overhead further, or raise debt capital instead of coming to equity markets, the outcome of this analysis still helps us understand how sustainable the Northamber’s operation is, and when things may have to change.
What this means for you:
Are you a shareholder? Northamber is inherently risky due to its current cash flow position. It is loss making and it is also burning through its cash at a fast rate. You now have a better understanding of the risks you may face holding onto the stock, since we know the company could potentially run into some issues in the next couple of months. Now that we’ve accounted for opex, you should also look at expected revenue growth in order to gauge when the company may become breakeven.
Are you a potential investor? The risks involved in investing in loss-making Northamber 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 current level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Northamber come to market to fund its growth.
An experienced management team on the helm increases our confidence in the business – have a peek at Northamber’s CEO experience and the tenure of the board here. If you believe you should cushion your portfolio with something less risky, scroll through my list of highly profitable companies to add to your portfolio..
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.