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Trailing twelve-month data shows us that Alpha Growth plc's (LON:ALGW) earnings loss has accumulated to -UK£585.9k. Although some investors expected this, their belief in the path to profitability for Alpha Growth may be wavering. 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? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Alpha Growth is spending more money than it earns, it will need to fund its expenses via external sources of capital. Alpha Growth may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
See our latest analysis for Alpha Growth
What is cash burn?
Currently, Alpha Growth has UK£133k in cash holdings and producing negative free cash flow of -UK£557.1k. The biggest threat facing Alpha Growth investors is the company going out of business when it runs out of money and cannot raise any more capital. Alpha Growth operates in the asset management and custody banks industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Alpha Growth 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 Alpha Growth need to raise more cash?
We can measure Alpha Growth's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
In Alpha Growth’s case, its cash outflows fell by 67% 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 Alpha Growth’s operations and the company may need to raise more capital within the year. Although this is a relatively simplistic calculation, and Alpha Growth may continue to reduce its costs further or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Alpha Growth operation is, and when things may have to change.
Next Steps:
The risks involved in investing in loss-making Alpha Growth means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. This may lead to share price pressure in the near term, should Alpha Growth be forced to raise capital to fund its growth. This is only a rough assessment of financial health, and ALGW likely also has company-specific issues impacting its cash management decisions. I suggest you continue to research Alpha Growth to get a better picture of the company by looking at: