We're Not Worried About PlaySide Studios' (ASX:PLY) Cash Burn

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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. 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.

See our latest analysis for PlaySide Studios

When Might PlaySide Studios Run Out Of Money?

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. 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. That means it had a cash runway of very many years as of December 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

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. It's nice to see that operating revenue was up 28% in the last year. 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?

Notwithstanding PlaySide Studios' revenue growth, it is still important to consider how it could raise more money, if it needs to. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of AU$108m, PlaySide Studios' AU$1.0m in cash burn equates to about 1.0% of its 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.

Is PlaySide Studios' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way PlaySide Studios is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. And even its revenue growth was very encouraging. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for PlaySide Studios that potential shareholders should take into account before putting money into a stock.

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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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