St George Mining Limited (ASX:SGQ) continues its loss-making streak, announcing a -$4.29M earnings for its latest financial year ending. The single most important question to ask when you’re investing in a loss-making company is – will they need to raise cash again, and if so, when? Looking at SGQ’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 SGQ
What is cash burn?
SGQ currently has $4.79M in the bank, with negative cash flows from operations of -$2.79M. 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 metals and mining. Although these companies can be unprofitable now, they tend to take on project-work, which can payoff sometime in the future.
When will SGQ need to raise more cash?
Opex (excluding one-offs) grew by 28.46% over the past year, which is rather substantial. This means that, if SGQ continues to grow its opex at this rate, given how much money it currently has in the bank, it will actually need to raise capital again in within the next 9 months! This is also the case if SGQ maintains its opex level of $6.7M, without growth, going forward. Although this is a relatively simplistic calculation, and SGQ may reduce its costs or raise debt capital instead of coming to equity markets, 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.
What this means for you:
Are you a shareholder? If SGQ makes up a reasonable portion of your portfolio, it’s always wise to consider cushioning your holdings with less risky, profitable stocks. You now have a better understanding of the risks you may face holding onto the stock, since we know the company could potentially run into some issues in the next couple of months. Now that we’ve accounted for opex growth, you should also look at expected revenue growth in order to gauge when the company may become breakeven.
Are you a potential investor? Loss-making companies are a risky play, especially those that are still growing its opex at a high rate. Though, this shouldn’t discourage you from considering entering the stock in the future. The outcome of my analysis suggests that if SGQ maintains the rate of opex growth, it will run out of cash within the year. An opportunity may exist for you to enter into the stock at an attractive price, should SGQ come to market to fund its operations.