Companies Like PlaySide Studios (ASX:PLY) Can Afford To Invest In Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for PlaySide Studios (ASX:PLY) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for PlaySide Studios

How Long Is PlaySide Studios' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2020, PlaySide Studios had AU$16m in cash, and was debt-free. Importantly, its cash burn was AU$1.0m over the trailing twelve months. So it had a very long cash runway of many years from December 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

Is PlaySide Studios' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because PlaySide Studios actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. We think that it's fairly positive to see that revenue grew 28% in the last twelve months. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how PlaySide Studios has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can PlaySide Studios Raise Cash?

While PlaySide Studios is showing solid revenue growth, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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 and drive 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.

PlaySide Studios' cash burn of AU$1.0m is about 0.8% of its AU$128m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is PlaySide Studios' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about PlaySide Studios' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even its revenue growth was very encouraging. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for PlaySide Studios that investors should know when investing in the stock.

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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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. 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.
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