Kandi Technologies Group Inc (NASDAQ:KNDI) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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 Kandi Technologies Group is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Kandi Technologies 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 Kandi Technologies Group
What is cash burn?
Kandi Technologies 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 -US$27.68M, Kandi Technologies Group is chipping away at its US$3.56M cash reserves in order to run its business. The measure of how fast Kandi Technologies Group 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. Kandi Technologies Group operates in the auto parts and equipment industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Kandi Technologies Group 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 Kandi Technologies Group need to raise more cash?
Kandi Technologies 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 the past year, opex (excluding one-offs) rose by 38.72%, which is rather substantial. My cash burn analysis suggests that, if Kandi Technologies Group continues to spend its cash reserves at this current high rate, it’ll have to raise capital within the upcoming months, which may be a surprise to some shareholders. Moreover, even if Kandi Technologies Group kept its opex level at US$67.95M, it will still have to come to market within the next year. Although this is a relatively simplistic calculation, and Kandi Technologies Group may reduce its costs or raise debt capital instead of coming to equity markets, the outcome of this analysis still helps us understand how sustainable the Kandi Technologies Group’s operation is, and when things may have to change.
Next Steps:The risks involved in investing in loss-making Kandi Technologies 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. Now you know that if the company was to continue to grow its opex at a double-digit 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 Kandi Technologies Group come to market to fund its growth. Keep in mind I haven’t considered other factors such as how KNDI is expected to perform in the future. You should continue to research Kandi Technologies Group to get a more holistic view of the company by looking at:
- Historical Performance: What has KNDI’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.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Kandi Technologies 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.