We Think Allied Gaming & Entertainment (NASDAQ:AGAE) Can Afford To Drive Business Growth
Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Allied Gaming & Entertainment (NASDAQ:AGAE) 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.
See our latest analysis for Allied Gaming & Entertainment
How Long Is Allied Gaming & Entertainment's Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at September 2023, Allied Gaming & Entertainment had cash of US$70m and no debt. Looking at the last year, the company burnt through US$7.8m. That means it had a cash runway of about 9.0 years as of September 2023. 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 9.3% in the last year. Also concerning, operating revenue was actually down by 4.0% in that time. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Allied Gaming & Entertainment is building its business over time.
How Hard Would It Be For Allied Gaming & Entertainment To Raise More Cash For Growth?
While Allied Gaming & Entertainment seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Allied Gaming & Entertainment's cash burn of US$7.8m is about 23% of its US$34m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
So, Should We Worry About Allied Gaming & Entertainment's Cash Burn?
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. Taking an in-depth view of risks, we've identified 2 warning signs for Allied Gaming & Entertainment that you should be aware of before investing.
Of course Allied Gaming & Entertainment 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.
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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.
