Respiri Limited (ASX:RSH) continues its loss-making streak, announcing a -$2.52M earnings for its latest financial year ending. Since RSH is currently burning more cash than it is making, it’s likely the business will need funding for future growth, and additional cash raising may dilute the value of your shares. Below, I’ve analysed the most recent financial data to help answer this question. Check out our latest analysis for Respiri
What is cash burn?
RSH currently has $1.59M in the bank, with negative cash flows from operations of -$2.91M. The biggest threat facing RSH’s investor is the company going out of business when it runs out of money and cannot raise any more capital. Furthermore, it is not uncommon to find loss-makers in an industry such as healthcare. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or falling behind competition on innovation and gaining market share by investing too slowly.
When will RSH need to raise more cash?
Opex declined by 17.65% over the past year, which could be an indication of RSH putting the brakes on ramping up high growth. However, this cost-reduction initiative is still not enough. Given the level of cash left in the bank, if RSH maintained its opex level of $3.1M, it will still run out of cash within the next couples of months. Although this is a relatively simplistic calculation, and RSH may continue to reduce its costs further or open a new line of credit instead of issuing new equity shares, the 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? 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. In addition to this analysis, I suggest you take a look at their expected revenue growth to determine the timing of future profitability as well.
Are you a potential investor? Loss-making companies are a risky play, even those that are reducing their opex over time. Though, this shouldn’t discourage you from considering entering the stock in the future. The outcome of my analysis suggests that even if RSH maintains this negative rate of opex growth, it will run out of cash within the year. This suggests an opportunity to enter into the stock, potentially at an attractive price, should RSH come to market to fund its growth.
An experienced management team on the helm increases our confidence in the business – take a look at who sits on RSH’s board and the CEO’s back ground and experience here. If you believe you should cushion your portfolio with something less risky, scroll through my list of highly profitable companies to add to your portfolio..
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.