Naked Brand Group Inc (NASDAQ:NAKD) continues its loss-making streak, announcing negative earnings for its latest financial year ending. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Additional cash raising may dilute the value of your shares, and since Naked Brand Group is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Naked Brand Group’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. Check out our latest analysis for Naked Brand Group
What is cash burn?
Naked Brand Group currently has US$2.17M in the bank, with negative cash flows from operations of -US$4.84M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. The riskiest factor facing investors of the company is the potential for the company to run out of cash without the ability to raise more money, i.e. the company goes out of business. Naked Brand Group operates in the apparel, accessories and luxury goods industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Naked Brand Group 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. NasdaqCM:NAKD Income Statement Mar 13th 18
When will Naked Brand Group need to raise more cash?
Opex, or operational expenses, are the necessary costs Naked Brand Group must pay to keep the business running every day. For the purpose of this calculation I’ve only accounted for sales, general and admin (SG&A) expenses, and R&D expenses incurred within this year. Over the last twelve months, opex (excluding one-offs) increased by 34.23%, which is considerably high. This means that, if Naked Brand Group continues to grow its opex at this rate, given how much money it currently has in the bank, it will actually need to raise capital again in within the next 3 months! This is also the case if Naked Brand Group maintains its opex level of US$8.68M, without growth, going forward. Even though this is analysis is fairly basic, and Naked Brand Group still can cut its overhead in the near future, or raise debt capital instead of coming to equity markets, 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.
The risks involved in investing in loss-making Naked Brand Group 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 outcome of my analysis suggests that if the company maintains the rate of opex growth, it will run out of cash within the year. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next. This is only a rough assessment of financial health, and I’m sure NAKD has company-specific issues impacting its cash management decisions. You should continue to research Naked Brand Group to get a more holistic view of the company by looking at:
- Historical Performance: What has NAKD’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Naked Brand Group’s board and the CEO’s back ground.
- 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 October 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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