Trailing twelve-month data shows us that Ark Royal SA’s (WSE:ARK) earnings loss has accumulated to -ZŁ49.90K. Although some investors expected this, their belief in the path to profitability for Ark Royal 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 Ark Royal is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined Ark Royal’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 Ark Royal
What is cash burn?
Ark Royal currently has less than a million in the bank, with negative cash flows from operations of -ZŁ2.03K. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. The most significant threat facing investor is the company going out of business when it runs out of money and cannot raise any more capital. Ark Royal operates in the specialty stores industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Ark Royal 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 Ark Royal need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for Ark Royal 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 Ark Royal’s case, its opex fell by 25.00% 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 Ark Royal maintained its opex level of ZŁ51.45K, it will still run out of cash within the next couples of months. Even though this is analysis is fairly basic, and Ark Royal still can cut its overhead further, 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.
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. 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. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Ark Royal come to market to fund its growth. Keep in mind I haven’t considered other factors such as how ARK is expected to perform in the future. I suggest you continue to research Ark Royal to get a more holistic view of the company by looking at:
- Valuation: What is ARK 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 ARK 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 Ark Royal’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.