Before buying into a stock, it is always important doing your own due diligence and while we can get all caught up about the company’s potential in terms of addressable market, product innovation and its growth potential, a glance into the company’s financial statements can tell you quite a lot.
Take the example of Nuheara (NUH), the company which has a hearing bud solution that aims to take market share from its more expensive and established hearing aid manufacturers.
It has a market cap of $80m and generating roughly annualised revenues of $4m. Its half yearly showed a loss of $4.27m or $8.54 annualised loss. While it is fair that start-ups are expected to have losses in its initial years of operation, NUH’s low sales gross profit (GP) of 27% and large operating overheads make it very hard IMO to achieve break even in the coming 3-5 years.
To cover its annual operating deficit of $8.54, it would need to generate sales of at least $31.6m ($8.54/0.27) given its low GP%. That $31.6m equates to almost 8 times its current annual revenue rate. In addition, quarter on quarter, its revenue receipts has just rose by 19% from $849k to $1m while salaries has gone from $485k per quarter to $731k.
In addition, there are another outstanding 100m in stock options that would provide dilution to the large 800m share base and contribute to share based expenses in the year ahead.
IMO its market cap valuation is ahead of itself - taking market share from existing incumbent and established hearing aid manufacturers may not be as easy and could take many years to achieve the scale needed to be profitable. The jury is out if it could have the lasting power to sustain before it reaches there despite having a ground to breaking product or technology. Its best bet may be to be taken over by one of the world's big hearing aid players if NUH's technology can prove to be a significant market threat. Unlike sticky SaaS services that does not require repetitive sales once a sticky customer is acquired, NUH business model is not so.
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