We're Interested To See How PlaySide Studios (ASX:PLY) Uses Its Cash Hoard To Grow

We can readily understand why investors are attracted to unprofitable companies. For example, PlaySide Studios (ASX:PLY) shareholders have done very well over the last year, with the share price soaring by 127%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So notwithstanding the buoyant share price, we think it's well worth asking whether PlaySide Studios' cash burn is too risky. 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for PlaySide Studios

Does PlaySide Studios Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2021, PlaySide Studios had AU$11m in cash, and was debt-free. In the last year, its cash burn was AU$6.0m. Therefore, from June 2021 it had roughly 23 months of cash runway. Notably, however, the one analyst we see covering the stock thinks that PlaySide Studios will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

Is PlaySide Studios' Revenue Growing?

Given that PlaySide Studios actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Notably, its strong revenue growth of 55% over the last year is genuinely cause for optimism. 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.

How Easily Can PlaySide Studios Raise Cash?

There's no doubt PlaySide Studios' revenue growth is impressive but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

PlaySide Studios has a market capitalisation of AU$407m and burnt through AU$6.0m last year, which is 1.5% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About PlaySide Studios' Cash Burn?

As you can probably tell by now, we're not too worried about PlaySide Studios' cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. And even though its cash runway wasn't quite as impressive, it was still a positive. It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. 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 1 warning sign for PlaySide Studios that investors should know when investing in the stock.

Of course PlaySide Studios 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.