Analyzing Emmerson’s Cash Burn Situation: Should Shareholders Be Concerned?

Investing in a business that is losing money can be a risky venture, but it is not impossible for shareholders to still make money if they buy into a good business at the right price. Companies like biotech and mining exploration companies often operate at a loss for years before finding success with a new treatment or mineral discovery. This potential for future success can drive investor interest and lead to significant gains.

However, it’s important to acknowledge the harsh reality that many loss-making companies ultimately fail to turn a profit and end up going bankrupt. So, should shareholders of Emmerson (LON:EML) be worried about its cash burn? In this report, we will delve into the company’s annual negative free cash flow and consider its cash runway by comparing its cash burn with its cash reserves.

As of June 2023, Emmerson had cash reserves of US$4.2 million with no debt. However, its cash burn over the trailing twelve months was US$6.7 million, giving it a cash runway of approximately 7 months. This short runway suggests that the company needs to either reduce its cash burn or find ways to replenish its cash reserves in order to sustain its operations.

Looking at the trend of Emmerson’s cash burn over time, we see a 14% reduction in the past year. While this indicates that management may be making efforts to manage expenditures, the lack of substantial operating revenue raises concerns about the company’s long-term sustainability. Investors may want to consider other stocks with growth potential that have more promising financial outlooks.

Furthermore, the ability of Emmerson to raise more cash for growth is an important factor to consider. With a market capitalization of US$33 million and a cash burn of US$6.7 million, the company would need to sell shares equivalent to 21% of its market value to cover another year’s operations at the current burn rate. This could result in costly dilution for existing shareholders.

In conclusion, while Emmerson’s reduction in cash burn is a positive development, its short cash runway and lack of significant revenue raise concerns about its financial stability. Shareholders should closely monitor how the company utilizes its cash and be aware of the potential risks involved. By conducting thorough research and staying informed, investors can make more informed decisions about their investments.

As always, it is recommended to seek professional financial advice before making any investment decisions. It’s essential to conduct thorough research and consider all factors before investing in any company, especially one that is facing financial challenges like Emmerson.