The Impact of Cash Burn on a Company’s Stock Performance
Just because a business does not make any money, does not necessarily mean that the stock will go down. There have been instances where companies that were initially making losses eventually turned things around and became highly profitable. A prime example of this is Amazon.com. The e-commerce giant made losses for many years after its initial public offering in 1997. However, investors who bought and held Amazon shares since 1999 would have made a fortune.
That being said, it is crucial to recognize that many loss-making companies do not experience the same success as Amazon. A significant number of these businesses burn through all their cash and ultimately go bankrupt. For shareholders of Allied Gaming & Entertainment (AG&E), a gaming and entertainment company, the key question is whether they should be concerned about the company’s cash burn rate and its potential impact on the stock’s performance.
Analyzing Allied Gaming & Entertainment’s Cash Runway
The cash runway of a company is calculated by dividing its cash reserves by its cash burn rate. As of September 2023, AG&E had cash reserves of US$70 million and no debt. Over the past year, the company’s cash burn was US$7.8 million. Based on these figures, AG&E had a cash runway of approximately 9.0 years from September 2023. While this is just one measure of cash burn, it suggests that shareholders have little to worry about in terms of AG&E running out of money.
It is important to note that cash burn is not the only factor to consider when evaluating a company’s financial health. However, in this case, the cash runway gives a positive impression, indicating that AG&E has a sufficient amount of cash to sustain its operations in the coming years.
Evaluating the Growth Prospects of Allied Gaming & Entertainment
One concern for investors is that AG&E has been increasing its cash burn rate, which has risen by 9.3% in the last year. Additionally, the company’s operating revenue has decreased by 4.0% during the same period. These figures might be worrisome for some investors when considering the company’s growth prospects.
However, it’s important to take a deeper look into the company’s growth trajectory and analyze its past performance to gain a comprehensive understanding. Further analysis can provide insight into the factors contributing to the growth numbers and whether they indicate a potential for future success.
Assessing Allied Gaming & Entertainment’s Ability to Raise Cash
Even though AG&E appears to be in a relatively good financial position, it is worth considering how easily the company could raise more cash to fuel its growth. Businesses often raise capital through debt or equity, and AG&E may have to sell new shares to raise additional funds and drive further growth.
By comparing the company’s annual cash burn to its total market capitalization, we can estimate the number of shares it would have to issue to sustain its operations for another year at the current cash burn rate. With a market capitalization of US$38 million, AG&E’s cash burn of US$7.8 million represents approximately 21% of its market value. If the company needed to issue enough shares to fund another year’s growth at the current share price, it could result in significant dilution for existing shareholders.
Should Investors Be Concerned About Allied Gaming & Entertainment’s Cash Burn?
Considering the analysis of AG&E’s cash burn, its cash runway gives reassurance that the company has sufficient cash reserves to sustain its operations in the coming years. However, the increasing cash burn rate may raise some concerns among investors. It is important to note that this analysis is based on historical data and does not account for unforeseen circumstances or changes in the market.
Every investment carries risks, and cash-burning companies involve a higher level of risk due to their reliance on external funding. It is recommended that investors undertake a comprehensive assessment of the potential risks and opportunities associated with investing in AG&E or any other company. Conducting thorough research and seeking professional advice can help investors make informed decisions about their investments.
Analyst comment
Positive news. AG&E has a cash runway of approximately 9.0 years, indicating they have enough cash to sustain operations. However, concerns arise as cash burn rate has increased and operating revenue has decreased. AG&E may need to raise more cash through debt or share issuance, potentially diluting existing shares. Investors should assess risks and opportunities before making investment decisions.
