Yahoo Finance How Long Will Loss-Making Angus Energy plc (LON:ANGS) Survive?
As the UK£7.7m market cap Angus Energy plc (LON:ANGS) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. 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. Today I’ve examined Angus Energy’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
See our latest analysis for Angus Energy
What is cash burn?
Currently, Angus Energy has UK£941k in cash holdings and producing negative free cash flow of -UK£7.4m. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Furthermore, it is not uncommon to find loss-makers in an industry such as energy. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
When will Angus Energy need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Angus Energy has to spend each year in order to keep its business running.
Free cash outflows declined by 37% over the past year, which could be an indication of Angus Energy putting the brakes on ramping up high growth. However, the current level of cash is not enough to sustain Angus Energy’s operations and the company may need to raise more capital within the year. Although this is a relatively simplistic calculation, and Angus Energy may continue to reduce its costs further or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the Angus Energy operation is, and when things may have to change.
Next Steps:
This analysis isn’t meant to deter you from Angus Energy, but rather, to help you better understand the risks involved investing in loss-making companies. Now you know that even if the company was to continue to shrink its cash burn at this rate, it will not be able to sustain its operations given the current level of cash reserves. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. Keep in mind I haven't considered other factors such as how ANGS is expected to perform in the future. You should continue to research Angus Energy to get a better picture of the company by looking at:
Historical Performance: What has ANGS'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 Angus Energy’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 March 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
