Sunworks Inc (NASDAQ:SUNW): Is It Growing Too Fast?

As the US$22.90M market cap Sunworks Inc (NASDAQ:SUNW) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to come back to market for additional capital raising. This may not always be on their own terms, which could hurt current shareholders if the new deal lowers the value of their shares. Today I’ve examined Sunworks’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 Sunworks

What is cash burn?

Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, Sunworks has US$6.36M in cash holdings and producing negative cash flows from its day-to-day activities of -US$4.09M. The measure of how fast Sunworks goes through its cash reserves over time is called the cash burn rate. 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. Sunworks operates in the electrical components and equipment industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. Sunworks runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.

NasdaqCM:SUNW Income Statement Apr 4th 18
NasdaqCM:SUNW Income Statement Apr 4th 18

When will Sunworks need to raise more cash?

Opex, or operational expenses, are the necessary costs Sunworks must pay to keep the business running every day. For the purpose of this calculation I’ve only accounted for sales, general and admin (SG&A) expenses, and R&D expenses incurred within this year. In the past year, opex (excluding one-offs) rose by 51.43%, which is considerably high. This means that, if Sunworks continues to grow its opex at this rate, given how much money it currently has in the bank, it will actually need to raise capital again in within the next 4 months! Moreover, even if Sunworks kept its opex level at US$19.57M, it will still have to come to market within the next year. Although this is a relatively simplistic calculation, and Sunworks may reduce its costs 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:

This analysis isn’t meant to deter you from Sunworks, but rather, to help you better understand the risks involved investing in loss-making companies. The outcome of my analysis suggests that if the company maintains the rate of opex growth, it will run out of cash within the year. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Sunworks come to market to fund its growth. I admit this is a fairly basic analysis for SUNW’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Sunworks to get a better picture of the company by looking at:
  1. Future Outlook: What are well-informed industry analysts predicting for SUNW’s future growth? Take a look at our free research report of analyst consensus for SUNW’s outlook.
  2. Valuation: What is SUNW 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 SUNW is currently mispriced by the market.
  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 December 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.