Here's Why We're Not Too Worried About Allied Gaming & Entertainment's (NASDAQ:AGAE) Cash Burn Situation
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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.
Given this risk, we thought we'd take a look at whether Allied Gaming & Entertainment (NASDAQ:AGAE) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for Allied Gaming & Entertainment
When Might Allied Gaming & Entertainment Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2023, Allied Gaming & Entertainment had cash of US$76m and no debt. Looking at the last year, the company burnt through US$11m. Therefore, from June 2023 it had 7.2 years of cash runway. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.
How Well Is Allied Gaming & Entertainment Growing?
Some investors might find it troubling that Allied Gaming & Entertainment is actually increasing its cash burn, which is up 4.0% in the last year. To be fair, given that fact it's hardly inspiring to see that the operating revenue was flat year on year. Considering both these factors, we're not particularly excited by its growth profile. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Allied Gaming & Entertainment is building its business over time.
How Easily Can Allied Gaming & Entertainment Raise Cash?
Even though it seems like Allied Gaming & Entertainment is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Allied Gaming & Entertainment has a market capitalisation of US$38m and burnt through US$11m last year, which is 28% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is Allied Gaming & Entertainment's Cash Burn A Worry?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Allied Gaming & Entertainment's cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Allied Gaming & Entertainment's situation. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Allied Gaming & Entertainment that potential shareholders should take into account before putting money into a stock.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
