Trailing twelve-month data shows us that Acorn International Inc’s (NYSE:ATV) earnings loss has accumulated to -US$3.04M. Although some investors expected this, their belief in the path to profitability for Acorn International 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. Additional cash raising may dilute the value of your shares, and since Acorn International is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Acorn International’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. View our latest analysis for Acorn International
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, Acorn International has US$25.06M in cash holdings and producing negative cash flows from its day-to-day activities of -US$14.30M. 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. Acorn International operates in the internet and direct marketing retail industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. Acorn International runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will Acorn International need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for Acorn International 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 Acorn International’s case, its opex fell by 37.71% last year, which may signal the company moving towards a more sustainable level of expenses. However, even with declining costs, the current level of cash is not enough to sustain Acorn International’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 Acorn International may continue to reduce its costs further 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:This analysis isn’t meant to deter you from Acorn International, but rather, to help you better understand the risks involved investing in loss-making companies. 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. I admit this is a fairly basic analysis for ATV’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Acorn International to get a more holistic view of the company by looking at:
- Valuation: What is ATV 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 ATV 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 Acorn 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.