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As the US$5.6m market cap Superconductor Technologies Inc. (NASDAQ:SCON) 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? Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Superconductor Technologies 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.
What is cash burn?
Superconductor Technologies currently has US$7.6m in the bank, with negative free cash flow of -US$6.8m. The riskiest factor facing investors of Superconductor Technologies is the potential for the company to run out of cash without the ability to raise more money. Furthermore, it is not uncommon to find loss-makers in an industry such as tech. 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 Superconductor Technologies need to raise more cash?
One way to measure the cost to Superconductor Technologies of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
In the past year, free cash outflows rose by 6.7%, which is fairly normal for a small-cap company. Though, my analysis suggests that Superconductor Technologies has a cash runway of 1.1 years, given its current level of cash holdings. This could mean it will be raising capital sooner than shareholders would like. This is also the case if Superconductor Technologies maintains its cash burn level of -US$6.8m, without growth, going forward. Although this is a relatively simplistic calculation, and Superconductor Technologies 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 Superconductor Technologies operation is, and when things may have to change.
The risks involved in investing in loss-making Superconductor Technologies means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. Now you know that if the company was to continue to grow its cash burn at its current 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 Superconductor Technologies be forced to raise capital to fund its growth. I admit this is a fairly basic analysis for SCON’s financial health. Other important fundamentals need to be considered as well. I suggest you continue to research Superconductor Technologies to get a better picture of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SCON’s future growth? Take a look at our free research report of analyst consensus for SCON’s outlook.
- Valuation: What is SCON worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SCON is currently mispriced by the market.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 29 September 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
To help readers see past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.
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