Corum Group Limited (ASX:COO) continues its loss-making streak, announcing negative earnings for its latest financial year ending. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Selling new shares may dilute the value of existing shares on issue, and since Corum Group is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Corum Group’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
View our latest analysis for Corum Group
What is cash burn?
Corum Group currently has AU$2.3m in the bank, with negative free cash flow of -AU$2.1m. The riskiest factor facing investors of Corum Group is the potential for the company to run out of cash without the ability to raise more money. Unprofitable companies operating in the fast-growing tech industry often face this problem, and Corum Group is no exception. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.
When will Corum Group 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 Corum Group has to spend each year in order to keep its business running.
Free cash outflows grew by 13% over the past year, which is relatively reasonable for a small-cap company. This means that, if Corum Group continues to grow its free cash outflows at this rate, given how much money it currently has in the bank, it will need to raise capital again in 1.4 years. Furthermore, even if Corum Group kept its cash burn rate at the current -AU$2.1m, it may need to raise capital in about 1.1 years. Although this is a relatively simplistic calculation, and Corum Group could reduce its costs or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the Corum Group operation is, and when things may have to change.
Next Steps:
Loss-making companies are a risky play, especially those that are still growing its cash burn at a high rate. Though, this shouldn’t discourage you from considering entering the stock in the future. Now you know that if the company was to continue to grow its cash burn at a double-digit 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 later on, if the company raises capital. Keep in mind I haven't considered other factors such as how COO is expected to perform in the future. I recommend you continue to research Corum Group to get a better picture of the company by looking at: