Should You Wait Before Investing In K2 Energy Limited (ASX:KTE)? – Simply Wall St

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As the AU$2.71m market cap K2 Energy Limited (ASX:KTE) 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 they 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 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. Looking at K2 Energy’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. View out our latest analysis for K2 Energy

What is cash burn?

With a negative operating cash flow of -AU$49.13k, K2 Energy is chipping away at its AU$29.38k cash reserves in order to run its business. The biggest threat facing K2 Energy’s investor is the company going out of business when it runs out of money and cannot raise any more capital. K2 Energy operates in the semiconductor equipment industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. K2 Energy 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. ASX:KTE Income Statement July 2nd 18

When will K2 Energy need to raise more cash?

K2 Energy has to pay its employees and other necessities such as rent and admin costs in order to keep its business running. These costs are called operational expenses, which is sometimes shortened to opex. In this calculation I’ve only included recurring sales, general and admin (SG&A) expenses, and R&D expenses occured within they year. Opex declined by 11.58% over the past year, which could be an indication of K2 Energy 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 K2 Energy maintained its opex level of AU$286.84k, it will still run out of cash within the next couples of months. Although this is a relatively simplistic calculation, and K2 Energy may continue to reduce its costs further or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the K2 Energy’s operation is, and when things may have to change.

Next Steps:

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 the company 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 K2 Energy come to market to fund its growth. Keep in mind I haven’t considered other factors such as how KTE is expected to perform in the future. I recommend you continue to research K2 Energy to get a better picture of the company by looking at:

  1. Valuation: What is KTE 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 KTE is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on K2 Energy’s board and the CEO’s back ground.
  3. 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 31 December 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

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