As the US$93m market cap Chembio Diagnostics, Inc. (NASDAQ:CEMI) released another year of negative earnings, investors may be on edge waiting for breakeven. 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 Chembio Diagnostics is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined Chembio Diagnostics’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
View our latest analysis for Chembio Diagnostics
What is cash burn?
Chembio Diagnostics currently has US$6.8m in the bank, with negative cash flows from operations of -US$5.4m. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Unprofitable companies operating in the high-growth healthcare industry often face this problem, and Chembio Diagnostics is no exception. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.
When will Chembio Diagnostics need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for Chembio Diagnostics 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 Chembio Diagnostics’s case, its opex fell by 9.9% last year, which may signal the company moving towards a more sustainable level of expenses. But, if the company maintains its opex at the current level of US$3.8m, it will still come to market within the next 1.8 years. Even though this is analysis is fairly basic, and Chembio Diagnostics still can cut its overhead further, or raise debt capital instead of coming to equity markets, the analysis still helps us understand how sustainable the Chembio Diagnostics’s operation is, and when things may have to change.
Next Steps:
The risks involved in investing in loss-making Chembio Diagnostics 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 outcome of my analysis suggests that if the company maintains this negative rate of opex growth, it will run out of cash in the upcoming years. 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. I admit this is a fairly basic analysis for CEMI’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Chembio Diagnostics to get a better picture of the company by looking at:- Future Outlook: What are well-informed industry analysts predicting for CEMI’s future growth? Take a look at our free research report of analyst consensus for CEMI’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Chembio Diagnostics’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.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 September 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.