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As the UK£7.7m market cap Angus Energy plc (LON:ANGS) 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. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Today I’ve examined Angus Energy’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
See our latest analysis for Angus Energy
What is cash burn?
Currently, Angus Energy has UK£941k in cash holdings and producing negative free cash flow of -UK£7.4m. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Furthermore, it is not uncommon to find loss-makers in an industry such as energy. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
When will Angus Energy 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 Angus Energy has to spend each year in order to keep its business running.
Free cash outflows declined by 37% over the past year, which could be an indication of Angus Energy putting the brakes on ramping up high growth. However, the current level of cash is not enough to sustain Angus Energy’s operations and the company may need to raise more capital within the year. Although this is a relatively simplistic calculation, and Angus Energy may continue to reduce its costs further or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the Angus Energy operation is, and when things may have to change.
Next Steps:
This analysis isn’t meant to deter you from Angus Energy, but rather, to help you better understand the risks involved investing in loss-making companies. Now you know that even if the company was to continue to shrink its cash burn 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 might be able to get shares at a lower price if the company raises capital next. Keep in mind I haven't considered other factors such as how ANGS is expected to perform in the future. You should continue to research Angus Energy to get a better picture of the company by looking at: