Herencia Resources plc (AIM:HER) announced a loss of -£2.96M in its most recent earnings update. Although some investors expected this, their belief in the path to profitability for HER may be wavering. 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. Looking at HER’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. See our latest analysis for HER
What is cash burn?
With a negative operating cash flow of -£1.46M, HER is chipping away at its £0.02M cash reserves in order to run its business. The biggest threat facing HER’s investor is the company going out of business when it runs out of money and cannot raise any more capital. Unprofitable companies operating in the highly risky metals and mining industry often face this problem, and HER is no exception. Although these companies can be unprofitable now, they tend to take on project-work, which can payoff sometime in the future.
When will HER need to raise more cash?
In HER’s case, its opex fell by 11.32% last year, which may signal the company moving towards a more sustainable level of expenses. However, this cost-reduction initiative is still not enough. Given the level of cash left in the bank, if HER maintained its opex level of £1.5M, it will still run out of cash within the next couples of months. Although this is a relatively simplistic calculation, and HER may continue to reduce its costs further or raise debt capital instead of coming to equity markets, the analysis still helps us understand how sustainable the HER’s operation is, and when things may have to change.
What this means for you:
Are you a shareholder? The outcome of this analysis should shed some light on HER’s cash situation and the risks you may or may not have been aware of as a shareholder of the company. Now that we’ve accounted for opex, you should also look at expected revenue growth in order to gauge when the company may become breakeven.
Are you a potential investor? The risks involved in investing in loss-making HER means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. Now you know that even if HER were to continue to shrink its opex at this rate, it will not be able to sustain its operations given the current level of cash reserves. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next.