Trailing twelve-month data shows us that Youngevity International Inc’s (NASDAQ:YGYI) earnings loss has accumulated to -US$12.94M. Although some investors expected this, their belief in the path to profitability for Youngevity International may be wavering. 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? 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 Youngevity International’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 Youngevity International
What is cash burn?
Youngevity International currently has US$673.00K in the bank, with negative cash flows from operations of -US$2.77M. 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. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Youngevity International operates in the personal products industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. Youngevity International runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will Youngevity International need to raise more cash?
Youngevity International 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. Over the last twelve months, opex (excluding one-offs) increased by 17.25%, which is rather substantial. This means that, if Youngevity International 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 within the next couple of months! Moreover, even if Youngevity International kept its opex level at US$103.83M, it will still have to come to market within the next year. Although this is a relatively simplistic calculation, and Youngevity International may reduce its costs or raise debt capital instead of coming to equity markets, the outcome of this 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: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 Youngevity International come to market to fund its growth. Keep in mind I haven’t considered other factors such as how YGYI is expected to perform in the future. I suggest you continue to research Youngevity International to get a better picture of the company by looking at:
- Valuation: What is YGYI 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 YGYI is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Youngevity International’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.