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Allot Ltd. (NASDAQ:ALLT) continues its loss-making streak, announcing negative earnings for its latest financial year ending. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? Selling new shares may dilute the value of existing shares on issue, and since Allot is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Allot’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
What is cash burn?
Currently, Allot has US$101m in cash holdings and producing negative free cash flow of -US$3.9m. The riskiest factor facing investors of Allot is the potential for the company to run out of cash without the ability to raise more money. Furthermore, it is not uncommon to find loss-makers in an industry such as tech. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or falling behind competition on innovation and gaining market share by investing too slowly.
When will Allot need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Allot has to spend each year in order to keep its business running.
In Allot’s case, its cash outflows fell by 29% last year, which may signal the company moving towards a more sustainable level of expenses. If the company does not increase its cash burn next year and remains at the current level of -US$3.9m, then it should not need to raise further capital for the next few years. Even though this is analysis is fairly basic, and Allot still can cut its overhead further, or open a new line of credit instead of issuing new shares, 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:Allot’s declining cash burn growth isn’t a good thing or a bad thing. It merely means the company will run down its cash reserves more slowly but also reinvest less in the business. Though, there are many factors that we haven’t considered in our basic analysis, this outcome gives a relatively broad overview of the company’s cash financial situation. Now that we’ve accounted for cash burn growth, you should also look at expected revenue growth in order to gauge when the company may become breakeven. Keep in mind I haven’t considered other factors such as how ALLT is expected to perform in the future. You should continue to research Allot to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALLT’s future growth? Take a look at our free research report of analyst consensus for ALLT’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Allot’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 31 March 2019. 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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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.