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As the €936k market cap Phicomm AG (FRA:HBD1) 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 Phicomm is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Phicomm’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
Check out our latest analysis for Phicomm
What is cash burn?
With a negative free cash flow of -€1.2m, Phicomm is chipping away at its €102k 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. Phicomm operates in the specialized finance industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Phicomm 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 Phicomm 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 Phicomm has to spend each year in order to keep its business running.
In Phicomm’s case, its cash outflows fell by 97% last year, which may signal the company moving towards a more sustainable level of expenses. However, the current level of cash is not enough to sustain Phicomm’s operations and the company may need to raise more capital within the year. Although this is a relatively simplistic calculation, and Phicomm may continue to reduce its costs further or borrow money instead of raising new equity capital, 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.
Next Steps:
Loss-making companies are a risky play, even those that are reducing their cash burn over time. Though, this shouldn’t discourage you from considering entering the stock in the future. 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. This may lead to share price pressure in the near term, should Phicomm be forced to raise capital to fund its growth. Keep in mind I haven't considered other factors such as how HBD1 is expected to perform in the future. You should continue to research Phicomm to get a better picture of the company by looking at: