Suda Limited (ASX:SUD) continues its loss-making streak, announcing a -$1.24M earnings for its latest financial year ending. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to come back to market for additional capital raising. This may not always be on their own terms, which could hurt current shareholders if the new deal lowers the value of their shares. Today I’ve examined SUD’s financial data to roughly assess when the company may need to raise new capital. View our latest analysis for Suda

What is cash burn?

With a negative operating cash flow of -$0.85M, SUD is chipping away at its $1.77M cash reserves in order to run its business. The riskiest factor facing investors of SUD is the potential for the company to run out of cash without the ability to raise more money. Unprofitable companies operating in the high-growth pharma industry often face this problem, and SUD is no exception. The industry is highly competitive, with companies racing to invest in innovation at the risk of burning through its cash too fast.

When will SUD need to raise more cash?

Opex (excluding one-offs) grew by 13.35% over the past year, which is relatively reasonable for a small-cap company. My cash burn analysis suggests that, if SUD continues to spend its cash reserves at this current rate, it’ll have to raise capital within the next 9 months, which may be a surprise to some shareholders. This is also the case if SUD maintains its opex level of $2.4M, without growth, going forward. Even though this is analysis is fairly basic, and SUD still can cut its overhead in the near future, 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? In the context of your portfolio, you should always seek to diversify, especially if you have a relatively high exposure to SUD. 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, 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. Now you know that if SUD were to continue to grow its opex at a double-digit rate, it will not be able to sustain its operations given the current level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should SUD come to market to fund its growth.