Assessment 2 - Step 4 - Ratios and Analysis

Ratios of BrainChip Holdings

Profitability Ratios

BrainChip’s profitability situation is dominated by what happened in 2023 and 2024. Gross Profit Margin continued to drop, moving from positive gross margins into a negative gross margin in 2024, which means costs of goods exceeded sales. The 2023 drop, aligned with a crash in revenue and 2024 pushed further into negative territory as production costs increased.

Net Profit Margin tells the same story. Operating expenses and share‑based payments far outweighing very small revenues. The exceptionally negative results in 2023 and 2024 were largely driven by the fall in sales revenue.

Return on Assets shows a worse version of the same patten. Despite a slight improvement in 2024 versus 2023, BrainChip is still destroying value on its asset base, reinforcing the need for much higher revenue. Overall, the profitability ratios point to a business that isn’t yet at scale, with sales volumes insufficient to cover costs.

Efficiency (Asset Management)

There was a severe overhang in inventory in 2023 after the sharp drop in sales, followed by a clear reduction in 2024. Even with that improvement, 165 days remains high for a semiconductor business given how quickly competitors develop products.

Total Asset Turnover was extremely weak across 23/24. BrainChip generated very low sales per dollar of assets, and its balance sheet hasn’t been converting into revenue. This points to sales challenges. The efficiency ratios point to a large cash holding that may be best utilised in marketing, to boost sales.

Liquidity

Liquidity is a relative bright spot. The current ratio is very strong, primarily because cash and cash equivalents were about $20.0m in 2024 against relatively small current liabilities of $2.33m. That creates a comfortable short‑term position despite persistent losses. The catch is the source of these funds. This liquidity is predominantly funded by share sales to LDA Capital, rather than operating cash flows. BrainChip will be ok to meet short‑term obligations and keep investing but that cushion depends on external capital unless revenues recover.

Financial Structure

Leverage is low and falling, which keeps financial risk contained. However, BrainChip has been funded mostly by share sales rather than product sales, which means dilution for existing holders. A rising equity share of funding reduces bankruptcy risk but dilutes existing shareholders.

Times Interest Earned isn’t very informative here, as EBIT is negative, so the usual analysis breaks down and the high figures shown are just a mirage, rather than an oasis, in this desert of good news. Overall, the capital structure is equity‑heavy and it lowers financial risk but at the cost of dilution and depressed earnings per share.

Market Ratios

EPS remained negative throughout, with 2024 better than 2023 but still in loss territory. The negative P/E reflects BrainChips loss‑making status. Any moves toward or away from zero mainly track share price volatility and changing losses rather than genuine profitability improvements.

Dividend ratios could not be calculated because BrainChip is not yet profitable and therefore does not issue dividends.

Net Asset Backing per Share fell in 2023, largely due to share dilution and balance sheet losses and hasn’t recovered.

Market/Book Ratio swung from optimism to distress in 2023 after the sales revenue crash, then partially recovered in 2024. The recovery was more likely based on speculation, rather than improving fundamentals, given continuing losses and minimal revenue. Investor sentiment has been volatile, which is consistent with a promising new technology, with uncertain commercial success.

In summary

The financial ratio situation is driven by the crash in revenue in 2023. BrainChip has strong liquidity and minimal leverage but their inability to convert assets into meaningful revenue remains the critical weakness. Without a significant lift in sales, reliance on equity funding will continue to dilute shareholder value. With this in mind, the ratios suggest that BrainChip really needs to focus on lifting sales and getting more commercial traction. Building stronger sales pipelines and forming partnerships with companies that can use BrainChip’s technology in their products would help drive revenue and reduce the need for constant capital raising. BrainChip’s future depends on whether they can turn their tech into steady, real-world sales.

Comparison to other firms

In comparison to the other firms studied in our class, BrainChip operates in an entirely different league. Unfortunately, that is an unprofitable, research and development stage, moonshot business, league. The other firms examined are profitable, established organisations with clear commercial success. They demonstrate market traction and a history of distributing dividends from their earnings.

The one notable advantage BrainChip holds over these more mature firms is the potential for substantial share price growth. While it doesn’t appear likely that BrainChip will achieve major commercial success in the near future, there remains the possibility that a future product breakthrough or strategic partnership could be transformative. Established firms generally have limited appetite, for this level of high‑risk, high‑reward innovation, as they have more to lose. With this in mind, BrainChip remains an fascinating company to follow over the coming years.