We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Betmakers Technology Group (ASX:BET) shareholders 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Betmakers Technology Group Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Betmakers Technology Group last reported its balance sheet in June 2019, it had zero debt and cash worth AU$453k. In the last year, its cash burn was AU$3.1m. So it had a cash runway of approximately 2 months from June 2019. Importantly, the one analyst we see covering the stock thinks that Betmakers Technology Group will reach cashflow breakeven in around 8 months. Essentially, that means the company will either reduce its cash burn, or else require more cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Betmakers Technology Group Growing?
Betmakers Technology Group managed to reduce its cash burn by 74% over the last twelve months, which suggests it's on the right flight path. But the top line growth tells a different story, with operating revenue falling 52% in that time. On balance, we'd say the company is improving over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Betmakers Technology Group Raise More Cash Easily?
Since Betmakers Technology Group revenue has been falling, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Betmakers Technology Group has a market capitalisation of AU$56m and burnt through AU$3.1m last year, which is 5.6% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
So, Should We Worry About Betmakers Technology Group's Cash Burn?
As you can probably tell by now, we're not too worried about Betmakers Technology Group's cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. Although we do find its cash runway to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Betmakers Technology Group insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
Of course Betmakers Technology Group may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.