Does Seven Stars Cloud Group Inc (NASDAQ:SSC) Have Enough Money Left To Grow?

Seven Stars Cloud Group Inc (NASDAQ:SSC) continues its loss-making streak, announcing negative earnings for its latest financial year ending. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Additional cash raising may dilute the value of your shares, and since Seven Stars Cloud Group is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Seven Stars Cloud Group’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 Seven Stars Cloud Group

What is cash burn?

Seven Stars Cloud Group currently has US$1.68M in the bank, with negative cash flows from operations of -US$7.26M. 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. The riskiest factor facing investors of the company is the potential for the company to run out of cash without the ability to raise more money, i.e. the company goes out of business. Unprofitable companies operating in the exciting, fast-growing tech industry often face this problem, and Seven Stars Cloud Group is no exception. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.

NasdaqCM:SSC Income Statement Mar 12th 18
NasdaqCM:SSC Income Statement Mar 12th 18

When will Seven Stars Cloud Group need to raise more cash?

Opex, or operational expenses, are the necessary costs Seven Stars Cloud Group 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 6.23%, which is relatively appropriate for a small-cap company. But, if Seven Stars Cloud Group continues to ramp up its opex at this rate, given how much money it currently has in the bank, it will actually need to come to market again within the next year. Furthermore, even if Seven Stars Cloud Group kept its opex level at the current US$14.49M, it will still be coming to market in the next couple of months. Even though this is analysis is fairly basic, and Seven Stars Cloud Group 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 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:

The risks involved in investing in loss-making Seven Stars Cloud Group means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The outcome of my analysis suggests that if the company maintains the rate of opex growth, it will run out of cash within the year. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Seven Stars Cloud Group come to market to fund its growth. I admit this is a fairly basic analysis for SSC’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Seven Stars Cloud Group to get a better picture of the company by looking at:
  1. Historical Performance: What has SSC’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.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Seven Stars Cloud Group’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 30 September 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.