Here's Why We're Watching Scout Gaming Group's (STO:SCOUT) Cash Burn Situation

January 14, 2020

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, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Scout Gaming Group (STO:SCOUT) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Scout Gaming Group

Does Scout Gaming Group Have A Long 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. Scout Gaming Group has such a small amount of debt that we'll set it aside, and focus on the kr28m in cash it held at September 2019. Importantly, its cash burn was kr59m over the trailing twelve months. So it had a cash runway of approximately 6 months from September 2019. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. The image below shows how its cash balance has been changing over the last few years.

OM:SCOUT Historical Debt, January 15th 2020

How Well Is Scout Gaming Group Growing?

Some investors might find it troubling that Scout Gaming Group is actually increasing its cash burn, which is up 35% in the last year. But looking on the bright side, its revenue gained by 51%, lending some credence to the growth narrative. Of course, with spend going up shareholders will want to see fast growth continue. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Scout Gaming Group is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Scout Gaming Group To Raise More Cash For Growth?

Given the trajectory of Scout Gaming Group's cash burn, many investors will already be thinking about how it might raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive 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.

Scout Gaming Group has a market capitalisation of kr203m and burnt through kr59m last year, which is 29% of the company's market value. 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 Scout Gaming Group's Cash Burn?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Scout Gaming Group's revenue growth was relatively promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Scout Gaming Group's CEO gets paid each year.

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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