What's The Outlook For Loss-Making SPI Energy Co Ltd. (NASDAQ:SPI)?

By
Simply Wall St
Published
March 28, 2018
NasdaqGS:SPI

As the US$49.73M market cap SPI Energy Co Ltd. (NASDAQ:SPI) 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. Additional cash raising may dilute the value of your shares, and since SPI Energy is currently burning more cash than it is making, it’s likely the business will need funding for future growth. SPI Energy may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question. See our latest analysis for SPI Energy

What is cash burn?

SPI Energy’s expenses are currently higher than the money it makes from its day-to-day operations, which means it is funding its overhead with equity capital a.k.a. its cash. With a negative operating cash flow of -US$47.03M, SPI Energy is chipping away at its US$4.18M cash reserves in order to run its business. How fast SPI Energy runs down its cash supply over time is known as the cash burn rate. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. SPI Energy operates in the semiconductors industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. SPI Energy runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.

NasdaqGS:SPI Income Statement Mar 28th 18
NasdaqGS:SPI Income Statement Mar 28th 18

When will SPI Energy need to raise more cash?

Opex, or operational expenses, are the necessary costs SPI Energy must pay to keep the business running every day. For the purpose of this calculation I've only accounted for sales, general and admin (SG&A) expenses, and R&D expenses incurred within this year. Over the last twelve months, opex (excluding one-offs) increased by 54.56%, which is rather substantial. My cash burn analysis suggests that, if SPI Energy continues to spend its cash reserves at this current high rate, it’ll have to raise capital within the upcoming months, which may be a surprise to some shareholders. Furthermore, even if SPI Energy kept its opex level at the current US$93.95M, it will still be coming to market in the next couple of months. Even though this is analysis is fairly basic, and SPI Energy still can cut its overhead in the near future, or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the SPI Energy’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. This suggests an opportunity to enter into the stock, potentially at an attractive price, should SPI Energy come to market to fund its growth. I admit this is a fairly basic analysis for SPI's financial health. Other important fundamentals need to be considered alongside. You should continue to research SPI Energy to get a better picture of the company by looking at:
  1. Valuation: What is SPI 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 SPI is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on SPI Energy’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.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2016. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

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Simply Wall St has no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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