Co-Diagnostics Inc (NASDAQ:CODX) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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 Co-Diagnostics is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Co-Diagnostics’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. Check out our latest analysis for Co-Diagnostics
What is cash burn?
Co-Diagnostics currently has US$3.53M in the bank, with negative cash flows from operations of -US$3.21M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. 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. Not surprisingly, it is more common to find unprofitable companies in the fast-growth healthcare industry. 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 Co-Diagnostics need to raise more cash?
Co-Diagnostics 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 (excluding one-offs) grew by 38.10% over the past year, which is rather substantial. This means that, if Co-Diagnostics 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 10 months! This is also the case if Co-Diagnostics maintains its opex level of US$4.53M, without growth, going forward. Although this is a relatively simplistic calculation, and Co-Diagnostics may reduce its costs or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the Co-Diagnostics’s operation is, and when things may have to change.
Next Steps:
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. An opportunity may exist for you to enter into the stock at an attractive price, should Co-Diagnostics come to market to fund its operations. This is only a rough assessment of financial health, and I’m sure CODX has company-specific issues impacting its cash management decisions. I recommend you continue to research Co-Diagnostics to get a better picture of the company by looking at:- Historical Performance: What has CODX’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 Co-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.