China Technology Solar Power Holdings Limited (SEHK:8111) 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 China Technology Solar Power Holdings is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined China Technology Solar Power Holdings’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. View our latest analysis for China Technology Solar Power Holdings

What is cash burn?

China Technology Solar Power Holdings currently has HK$4.71M in the bank, with negative cash flows from operations of -HK$91.20M. 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. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Unprofitable companies operating in the exciting, fast-growing tech industry often face this problem, and China Technology Solar Power Holdings is no exception. The industry is highly competitive, with companies racing to invest in innovation at the risk of burning through its cash too fast.

SEHK:8111 Income Statement May 15th 18
SEHK:8111 Income Statement May 15th 18

When will China Technology Solar Power Holdings need to raise more cash?

Opex, or operational expenses, are the necessary costs China Technology Solar Power Holdings 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 25.00%, which is rather substantial. My cash burn analysis suggests that, if China Technology Solar Power Holdings continues to spend its cash reserves at this current high rate, it’ll have to raise capital within the upcoming months, which may be a surprise to some shareholders. Furthermore, even if China Technology Solar Power Holdings kept its opex level at the current HK$54.19M, it will still be coming to market in the next couple of months. Even though this is analysis is fairly basic, and China Technology Solar Power Holdings still can cut its overhead in the near future, or open a new line of credit instead of issuing new equity shares, the outcome of this analysis still helps us understand how sustainable the China Technology Solar Power Holdings’s operation is, and when things may have to change.

Next Steps:

This analysis isn’t meant to deter you from China Technology Solar Power Holdings, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its high opex growth and its level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should China Technology Solar Power Holdings come to market to fund its operations. I admit this is a fairly basic analysis for 8111’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research China Technology Solar Power Holdings to get a better picture of the company by looking at:

  1. Historical Performance: What has 8111’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.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on China Technology Solar Power Holdings’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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