As the ØRE350.58M market cap Havyard Group ASA (OB:HYARD) released another year of negative earnings, investors may be on edge waiting for breakeven. 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 Havyard Group is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined Havyard Group’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. See our latest analysis for Havyard Group
What is cash burn?
Havyard Group’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 -ØRE14.38M, Havyard Group is chipping away at its ØRE206.07M cash reserves in order to run its business. How fast Havyard Group runs down its cash supply over time is known as 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. Havyard Group operates in the construction machinery and heavy trucks industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. Havyard Group runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will Havyard Group need to raise more cash?
Havyard 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. Over the last twelve months, opex (excluding one-offs) increased by 2.10%, which is relatively appropriate for a small-cap company. Though, if opex continues to rise at this rate, given how much cash reserves Havyard Group currently has, it will actually need to raise capital again within the next couple of months! Moreover, even if Havyard Group kept its opex level at ØRE354.68M, it will still have to come to market within the next year. Even though this is analysis is fairly basic, and Havyard Group still can cut its overhead in the near future, or raise debt capital instead of coming to equity markets, the analysis still helps us understand how sustainable the Havyard Group’s operation is, and when things may have to change.
Next Steps:The risks involved in investing in loss-making Havyard Group 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 opex growth rate and its level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Havyard Group come to market to fund its growth. I admit this is a fairly basic analysis for HYARD’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Havyard Group to get a better picture of the company by looking at:
- Valuation: What is HYARD 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 HYARD is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Havyard Group’s board and the CEO’s back ground.
- 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.