When Will GI Engineering Solutions Limited (NSE:GISOLUTION) Run Out Of Cash?

GI Engineering Solutions Limited (NSEI:GISOLUTION) 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 GI Engineering Solutions is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at GI Engineering Solutions’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. See our latest analysis for GI Engineering Solutions

What is cash burn?

GI Engineering Solutions’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 -₹6.08M, GI Engineering Solutions is chipping away at its ₹250.70K cash reserves in order to run its business. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. 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. GI Engineering Solutions operates in the construction and engineering industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. GI Engineering Solutions faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.

When will GI Engineering Solutions need to raise more cash?

GI Engineering Solutions 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. Opex declined by 25.00% over the past year, which could be an indication of GI Engineering Solutions putting the brakes on ramping up high growth. However, even with declining costs, the current level of cash is not enough to sustain GI Engineering Solutions’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 GI Engineering Solutions may continue to reduce its costs further or raise debt capital instead of coming to equity markets, 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:

Loss-making companies are a risky play, even those that are reducing their opex over time. 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 current level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should GI Engineering Solutions come to market to fund its growth. This is only a rough assessment of financial health, and I'm sure GISOLUTION has company-specific issues impacting its cash management decisions. I recommend you continue to research GI Engineering Solutions to get a more holistic view of the company by looking at:

1. Valuation: What is GISOLUTION 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 GISOLUTION is currently mispriced by the market.
2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on GI Engineering Solutions’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 March 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.