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As the HK$2.7b market cap Esprit Holdings Limited (HKG:330) released another year of negative earnings, investors may be on edge waiting for breakeven. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? Selling new shares may dilute the value of existing shares on issue, and since Esprit Holdings is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Esprit Holdings’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
View our latest analysis for Esprit Holdings
What is cash burn?
With a negative free cash flow of -HK$897.0m, Esprit Holdings is chipping away at its HK$3.3b cash reserves in order to run its business. The biggest threat facing Esprit Holdings investors is the company going out of business when it runs out of money and cannot raise any more capital. Esprit Holdings operates in the apparel retail industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Esprit Holdings faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.
When will Esprit 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 Esprit Holdings has to spend each year in order to keep its business running.
Free cash outflows declined by 23% over the past year, which could be an indication of Esprit Holdings putting the brakes on ramping up high growth. If Esprit Holdings kept its cash burn rate at -HK$897.0m, it may not need to raise capital for another couple of years. Although this is a relatively simplistic calculation, and Esprit Holdings may continue to reduce its costs further or borrow money instead of raising new equity capital, this analysis still helps us understand how sustainable the Esprit Holdings operation is, and when things may have to change.
Next Steps:
Investors can breathe easy knowing that Esprit Holdings likely won’t be raising new capital any time soon. This cash burn analysis should give you some colour on the company’s cash position, however, keep in mind there are other non-operational expenses which we have not incorporated. cash burn is only one side of the coin. I recommend also looking at revenues in order to forecast when the company will become breakeven and start producing profits for shareholders. Keep in mind I haven't considered other factors such as how 330 is expected to perform in the future. You should continue to research Esprit Holdings to get a better picture of the company by looking at: