Trailing twelve-month data shows us that BSQUARE Corporation’s (NASDAQ:BSQR) earnings loss has accumulated to -US$11.69M. Although some investors expected this, their belief in the path to profitability for BSQUARE 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that BSQUARE is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined BSQUARE’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. Check out our latest analysis for BSQUARE
What is cash burn?
BSQUARE currently has US$21.44M in the bank, with negative cash flows from operations of -US$9.25M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. How fast BSQUARE 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. Unprofitable companies operating in the exciting, fast-growing tech industry often face this problem, and BSQUARE is no exception. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or the risk of falling behind competition on innovation and gaining market share by investing too slowly.
When will BSQUARE need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for BSQUARE 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. Opex (excluding one-offs) grew by 10.68% over the past year, which is fairly normal for a small-cap. My cash burn analysis suggests that, if BSQUARE continues to spend its cash reserves at this current rate, it’ll have to raise capital within the next 9 months, which may be a surprise to some shareholders. Moreover, even if BSQUARE kept its opex level at US$29.01M, it will still have to come to market within the next year. Even though this is analysis is fairly basic, and BSQUARE still can cut its overhead in the near future, or open a new line of credit instead of issuing new equity shares, the outcome of this analysis still helps us understand how sustainable the BSQUARE’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. The cash burn analysis result indicates a cash constraint for the company, due to its high opex growth and its 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. This is only a rough assessment of financial health, and I’m sure BSQR has company-specific issues impacting its cash management decisions. You should continue to research BSQUARE to get a more holistic view of the company by looking at:
- Historical Performance: What has BSQR’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 BSQUARE’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.