Should You Wait Before Investing In Jindal Cotex Limited (NSE:JINDCOT)?

Jindal Cotex Limited (NSEI:JINDCOT) 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Jindal Cotex is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined Jindal Cotex’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. View our latest analysis for Jindal Cotex

What is cash burn?

Jindal Cotex’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 -₹22.08M, Jindal Cotex is chipping away at its ₹67.49M cash reserves in order to run its business. The measure of how fast Jindal Cotex goes through its cash reserves over time is called the cash burn rate. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Jindal Cotex operates in the textiles industry, which delivered a positive EPS of ₹43.87 in the past year. This means, on average, its industry peers operating are profitable. Jindal Cotex runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.

NSEI:JINDCOT Income Statement Jan 31st 18
NSEI:JINDCOT Income Statement Jan 31st 18

When will Jindal Cotex need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for Jindal Cotex 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. Over the last twelve months, opex (excluding one-offs) increased by 0.0096%, which is relatively appropriate for a small-cap company. But, if Jindal Cotex continues to ramp up its opex at this rate, given how much money it currently has in the bank, it will actually need to come to market again within the next year. This is also the case if Jindal Cotex maintains its opex level of ₹119.46M, without growth, going forward. Although this is a relatively simplistic calculation, and Jindal Cotex may reduce its costs 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.

What this means for you:

This analysis isn’t meant to deter you from Jindal Cotex, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its current opex growth rate 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. Keep in mind I haven’t considered other factors such as how JINDCOT is expected to perform in the future. I recommend you continue to research Jindal Cotex to get a better picture of the company by looking at: 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.