As the $4.84M market cap Comstock Holding Companies Inc (NASDAQ:CHCI) 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. 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. Looking at Comstock Holding Companies’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. See our latest analysis for Comstock Holding Companies
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, Comstock Holding Companies has $2.09M in cash holdings and producing negative cash flows from its day-to-day activities of -$2.62M. How fast Comstock Holding Companies runs down its cash supply over time is known as the cash burn rate. 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. Comstock Holding Companies operates in the homebuilding industry, which has an average EPS of $63.96, meaning the majority of its peers are profitable. Comstock Holding Companies 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 Comstock Holding Companies need to raise more cash?
Comstock Holding Companies 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. Opex declined by 5.06% over the past year, which could be an indication of Comstock Holding Companies putting the brakes on ramping up high growth. However, even with declining costs, the current level of cash is not enough to sustain Comstock Holding Companies’s operations and the company may need to come to market to raise more capital within the year. Although this is a relatively simplistic calculation, and Comstock Holding Companies may continue to reduce its costs further or raise debt capital instead of coming to equity markets, the analysis still helps us understand how sustainable the Comstock Holding Companies’s operation is, and when things may have to change.
What this means for you:The risks involved in investing in loss-making Comstock Holding Companies 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 level of cash reserves. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next. This is only a rough assessment of financial health, and I’m sure CHCI has company-specific issues impacting its cash management decisions. I recommend you continue to research Comstock Holding Companies to get a more holistic view of the company by looking at:
- 1. Historical Performance: What has CHCI’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.
- 2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Comstock Holding Companies’s board and the CEO’s back ground.
- 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.