We're Hopeful That PointsBet Holdings (ASX:PBH) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for PointsBet Holdings (ASX:PBH) shareholders is whether they should be concerned by its rate of 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.

View our latest analysis for PointsBet Holdings

How Long Is PointsBet Holdings' Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at December 2021, PointsBet Holdings had cash of AU$569m and no debt. In the last year, its cash burn was AU$211m. That means it had a cash runway of about 2.7 years as of December 2021. Notably, analysts forecast that PointsBet Holdings will break even (at a free cash flow level) in about 3 years. That means it doesn't have a great deal of breathing room, but it shouldn't really need more cash, considering that cash burn should be continually reducing. The image below shows how its cash balance has been changing over the last few years.

How Well Is PointsBet Holdings Growing?

Notably, PointsBet Holdings actually ramped up its cash burn very hard and fast in the last year, by 140%, signifying heavy investment in the business. Of course, the truly verdant revenue growth of 110% in that time may well justify the growth spend. On balance, we'd say the company is improving over time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can PointsBet Holdings Raise More Cash Easily?

While PointsBet Holdings 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. Many companies end up issuing new shares to fund future 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.

PointsBet Holdings has a market capitalisation of AU$972m and burnt through AU$211m last year, which is 22% 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 PointsBet Holdings' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought PointsBet Holdings' revenue growth was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. 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 PointsBet Holdings' situation. Taking an in-depth view of risks, we've identified 3 warning signs for PointsBet Holdings that you should be aware of before investing.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.