Analysing results for pre-profit companies

Firstly, we take a hard look at the cash flow figures that are usually lifted from the quarterly cash flow report (Appendix 4C), particularly ‘Receipts from customers’ and net cash used in operating activities.  Under ASX listing rules many unprofitable businesses are required to lodge 4C reports with the ASX.  Most importantly these give us timely (every 3 months), transparent and regular insights into the most important metrics of a growing business, being sales and costs. These enable us to quickly gauge if a company is performing to our expectations.

Secondly, and particularly if the business is yet to be profitable, we pay close attention to the available cash and whether this provides ample runway for the company to reach profitability in the next 12-18 months.  If this is not the case, then we would expect some type of capital raising event which is never great for a company’s near-term share price prospects.

Lastly, we take great interest in any outlook statements given by the company, that are usually contained at the end of any half-yearly earnings report.  For us it’s often that case that we read the report backwards.  To delve further into the commentary, we pay close attention to what was said in prior periods and if the current rhetoric matches with that and indeed, the notes we may have taken from meetings with the business in the past.  Despite the extensive research, we conduct in trying to understand companies and industries, it is usually the case that we have to rely on management’s view on their prospects. If we don’t have faith if their outlook, then clearly these are business that we do not hold in our fund.