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As the UK£5.8m market cap Cambridge Cognition Holdings Plc (LON:COG) 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Cambridge Cognition Holdings is spending more money than it earns, it will need to fund its expenses via external sources of capital. Cambridge Cognition Holdings 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.
See our latest analysis for Cambridge Cognition Holdings
What is cash burn?
With a negative free cash flow of -UK£669.0k, Cambridge Cognition Holdings is chipping away at its UK£1.1m cash reserves in order to run its business. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Unprofitable companies operating in the high-growth healthcare industry often face this problem, and Cambridge Cognition Holdings is no exception. 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 Cambridge Cognition Holdings need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Cambridge Cognition Holdings has to spend each year in order to keep its business running.
In Cambridge Cognition Holdings’s case, its cash outflows fell by 11% last year, which may signal the company moving towards a more sustainable level of expenses. But, if the company maintains its cash burn at the current level of -UK£669.0k, it may still need additional capital within the next 1.7 years. Although this is a relatively simplistic calculation, and Cambridge Cognition Holdings may continue to reduce its costs further or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Cambridge Cognition Holdings operation is, and when things may have to change.
Next Steps:
The risks involved in investing in loss-making Cambridge Cognition Holdings 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 this negative rate of cash burn growth, it will run out of cash in the upcoming years. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Cambridge Cognition Holdings raise capital to fund its growth. Keep in mind I haven't considered other factors such as how COG is expected to perform in the future. You should continue to research Cambridge Cognition Holdings to get a better picture of the company by looking at: