As the US$1.1b market cap Infinera Corporation (NASDAQ:INFN) 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Infinera is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Infinera’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 Infinera
What is cash burn?
Currently, Infinera has US$447m in cash holdings and producing negative cash flows from its day-to-day activities of -US$29m. The biggest threat facing Infinera’s investor is the company going out of business when it runs out of money and cannot raise any more capital. Infinera operates in the communications equipment industry, which delivered positive earnings in the past year. This means, on average, its industry peers are profitable. Infinera runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will Infinera need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for Infinera 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. In the past year, opex (excluding one-offs) rose by 13%, which is relatively reasonable for a small-cap company. This means that, if Infinera continues to grow its opex at this rate, given how much money it currently has in the bank, it will need to raise capital again in 1.1 years. Furthermore, even if Infinera kept its opex level at the current US$408m, it will still be coming to market in about 1.1 years. Even though this is analysis is fairly basic, and Infinera still can cut its overhead in the near future, or raise debt capital instead of coming to equity markets, the outcome of this analysis still helps us understand how sustainable the Infinera’s operation is, and when things may have to change.
Next Steps:
The risks involved in investing in loss-making Infinera 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 in the upcoming years. An opportunity may exist for you to enter into the stock at an attractive price, should Infinera come to market to fund its operations. I admit this is a fairly basic analysis for INFN’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Infinera to get a better picture of the company by looking at:- Future Outlook: What are well-informed industry analysts predicting for INFN’s future growth? Take a look at our free research report of analyst consensus for INFN’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Infinera’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 29 September 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.