As the US$17.10M market cap Document Security Systems Inc (AMEX:DSS) released another year of negative earnings, investors may be on edge waiting for breakeven. 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 Document Security Systems is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Document Security Systems’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 Document Security Systems
What is cash burn?
Document Security Systems currently has US$4.19M in the bank, with negative cash flows from operations of -US$1.37M. 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 most significant threat facing investor is the company going out of business when it runs out of money and cannot raise any more capital. Unprofitable companies operating in the exciting, fast-growing tech industry often face this problem, and Document Security Systems is no exception. The industry is highly competitive, with companies racing to invest in innovation at the risk of burning through its cash too fast.
When will Document Security Systems need to raise more cash?
Document Security Systems has to pay its employees and other necessities such as rent and admin costs in order to keep its business running. These costs are called operational expenses, which is sometimes shortened to opex. In this calculation I’ve only included recurring sales, general and admin (SG&A) expenses, and R&D expenses occured within they year. Opex declined by 11.74% over the past year, which could be an indication of Document Security Systems putting the brakes on ramping up high growth. However, even with declining costs, the current level of cash is not enough to sustain Document Security Systems’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 Document Security Systems may continue to reduce its costs further or raise debt capital instead of coming to equity markets, 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 Document Security Systems 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 even if the company maintains this negative rate of opex growth, it will run out of cash within the year. An opportunity may exist for you to enter into the stock at an attractive price, should Document Security Systems come to market to fund its operations. This is only a rough assessment of financial health, and I’m sure DSS has company-specific issues impacting its cash management decisions. You should continue to research Document Security Systems to get a more holistic view of the company by looking at:- Historical Performance: What has DSS’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 Document Security Systems’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.