Should You Sell Staffing 360 Solutions Inc (NASDAQ:STAF) For This Reason?

In the most recent twelve months, Staffing 360 Solutions Inc's (NASDAQ:STAF) earnings loss has accumulated to -$9.48M. Although some investors expected this, their belief in the path to profitability for Staffing 360 Solutions may be wavering. 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 Staffing 360 Solutions is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined Staffing 360 Solutions’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. Check out our latest analysis for Staffing 360 Solutions

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, Staffing 360 Solutions has $5.38M in cash holdings and producing negative cash flows from its day-to-day activities of -$5.64M. How fast Staffing 360 Solutions 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. Staffing 360 Solutions operates in the human resource and employment services industry, which has an average EPS of $12.98, meaning the majority of its peers are profitable. Staffing 360 Solutions 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 Staffing 360 Solutions need to raise more cash?

Opex, or operational expenses, are the necessary costs Staffing 360 Solutions 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 36.33%, which is considerably high. This means that, if Staffing 360 Solutions 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 2 months! Moreover, even if Staffing 360 Solutions kept its opex level at $29.46M, it will still have to come to market within the next year. Although this is a relatively simplistic calculation, and Staffing 360 Solutions may reduce its costs or raise debt capital instead of coming to equity markets, the analysis still helps us understand how sustainable the Staffing 360 Solutions’s operation is, and when things may have to change.

What this means for you:

Loss-making companies are a risky play, especially those that are still growing its opex at a high rate. Though, this shouldn’t discourage you from considering entering the stock in the future. 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 Staffing 360 Solutions come to market to fund its growth. Keep in mind I haven't considered other factors such as how STAF is expected to perform in the future. I suggest you continue to research Staffing 360 Solutions to get a more holistic view of the company by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for STAF’s future growth? Take a look at our free research report of analyst consensus for STAF’s outlook.
• 2. Valuation: What is STAF 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 STAF 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 30 September 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.