As the CA$154m market cap Abacus Health Products, Inc. (CNSX:ABCS) 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. Selling new shares may dilute the value of existing shares on issue, and since Abacus Health Products is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Abacus Health Products’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
View our latest analysis for Abacus Health Products
What is cash burn?
With a negative free cash flow of -US$11.6m, Abacus Health Products is chipping away at its US$32m cash reserves in order to run its business. The riskiest factor facing investors of Abacus Health Products is the potential for the company to run out of cash without the ability to raise more money. Furthermore, it is not uncommon to find loss-makers in an industry such as pharma. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or falling behind competition on innovation and gaining market share by investing too slowly.
When will Abacus Health Products need to raise more cash?
One way to measure the cost to Abacus Health Products of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
Free cash outflows declined by 93% over the past year, which could be an indication of Abacus Health Products putting the brakes on ramping up high growth. But, if the company maintains its cash burn at the current level of -US$11.6m, it may still need additional capital within the next 2.8 years. Even though this is analysis is fairly basic, and Abacus Health Products still can cut its overhead further, or borrow money instead of raising new equity capital, the outcome of this 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 Abacus Health Products 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 cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. The potential equity raising resulting from this means you might get a better deal on the share price if the company the company raises capital again. Keep in mind I haven't considered other factors such as how ABCS is expected to perform in the future. I suggest you continue to research Abacus Health Products to get a better picture of the company by looking at: