Yahoo Finance We're Not Worried About Gaming Realms' (LON:GMR) Cash Burn
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Gaming Realms (LON:GMR) shareholders have done very well over the last year, with the share price soaring by 378%. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
In light of its strong share price run, we think now is a good time to investigate how risky Gaming Realms' cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Check out our latest analysis for Gaming Realms
When Might Gaming Realms Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Gaming Realms last reported its balance sheet in December 2020, it had zero debt and cash worth UK£2.1m. In the last year, its cash burn was UK£455k. That means it had a cash runway of about 4.6 years as of December 2020. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.
How Well Is Gaming Realms Growing?
Gaming Realms managed to reduce its cash burn by 89% over the last twelve months, which is extremely promising, when it comes to considering its need for cash. This reduction was no doubt supported by its strong revenue growth of 66% in the same period. Overall, we'd say its growth is rather impressive. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Gaming Realms To Raise More Cash For Growth?
We are certainly impressed with the progress Gaming Realms has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Gaming Realms' cash burn of UK£455k is about 0.4% of its UK£121m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is Gaming Realms' Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Gaming Realms' cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. But it's fair to say that its cash burn relative to its market cap was also very reassuring. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Gaming Realms (of which 1 makes us a bit uncomfortable!) you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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