Dilution Ahead For Asia Energy Logistics Group Limited (HKG:351) Shareholders?

As the HK$219.14M market cap Asia Energy Logistics Group Limited (SEHK:351) released another year of negative earnings, investors may be on edge waiting for breakeven. 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? Additional cash raising may dilute the value of your shares, and since Asia Energy Logistics Group is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Asia Energy Logistics 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 Asia Energy Logistics Group

What is cash burn?

Asia Energy Logistics Group currently has HK$9.90M in the bank, with negative cash flows from operations of -HK$107.34M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. The measure of how fast Asia Energy Logistics Group goes through its cash reserves over time is called the cash burn rate. The riskiest factor facing investors of the company is the potential for the company to run out of cash without the ability to raise more money, i.e. the company goes out of business. Asia Energy Logistics Group operates in the highways and railtracks industry, which delivered a positive EPS of HK$0.77 in the past year. This means, on average, its industry peers operating are profitable. Asia Energy Logistics Group runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.

When will Asia Energy Logistics Group need to raise more cash?

Asia Energy Logistics 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 Asia Energy Logistics Group’s case, its opex fell by 12.34% last year, which may signal the company moving towards a more sustainable level of expenses. However, even with declining costs, the current level of cash is not enough to sustain Asia Energy Logistics Group’s operations and the company may need to come to market to raise more capital within the year. Although this is a relatively simplistic calculation, and Asia Energy Logistics Group 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.

What this means for you:

This analysis isn’t meant to deter you from Asia Energy Logistics Group, 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. An opportunity may exist for you to enter into the stock at an attractive price, should Asia Energy Logistics Group come to market to fund its operations. Keep in mind I haven't considered other factors such as how 351 is expected to perform in the future. I recommend you continue to research Asia Energy Logistics Group to get a more holistic view of the company by looking at:

1. Historical Performance: What has 351'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 Asia Energy Logistics 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 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.