As the US$14.01M market cap xG Technology Inc (NASDAQ:XGTI) 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 xG Technology is currently burning more cash than it is making, it’s likely the business will need funding for future growth. xG Technology may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question. Check out our latest analysis for xG Technology
What is cash burn?
xG Technology’s expenses are currently higher than the money it makes from its day-to-day operations, which means it is funding its overhead with equity capital a.k.a. its cash. With a negative operating cash flow of -US$4.48M, xG Technology is chipping away at its US$2.80M cash reserves in order to run its business. 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. Furthermore, it is not uncommon to find loss-makers in an industry such as tech. The industry is highly competitive, with companies racing to invest in innovation at the risk of burning through its cash too fast.
When will xG Technology need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for xG Technology 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 17.88%, which is considerably high. This means that, if xG Technology continues to grow its opex at this rate, given how much money it currently has in the bank, it will actually need to raise capital again within the next couple of months! Moreover, even if xG Technology kept its opex level at US$34.11M, it will still have to come to market within the next year. Although this is a relatively simplistic calculation, and xG Technology may reduce its costs or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the xG Technology’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. Now you know that if the company was to continue to grow its opex at a double-digit rate, it will not be able to sustain its operations given the current level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should xG Technology come to market to fund its operations. I admit this is a fairly basic analysis for XGTI’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research xG Technology to get a more holistic view of the company by looking at:
- Historical Performance: What has XGTI’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 xG Technology’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.