Will Gfinity (LON:GFIN) Spend Its Cash Wisely?

We can readily understand why investors are attracted to unprofitable companies. Indeed, Gfinity (LON:GFIN) stock is up 146% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

In light of its strong share price run, we think now is a good time to investigate how risky Gfinity's cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Gfinity

Does Gfinity Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Gfinity has such a small amount of debt that we'll set it aside, and focus on the UK£1.8m in cash it held at December 2020. In the last year, its cash burn was UK£3.3m. Therefore, from December 2020 it had roughly 7 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is Gfinity Growing?

Gfinity managed to reduce its cash burn by 60% over the last twelve months, which suggests it's on the right flight path. Unfortunately, however, operating revenue dropped 43% during the same time frame. On balance, we'd say the company is improving over time. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Gfinity is building its business over time.

How Hard Would It Be For Gfinity To Raise More Cash For Growth?

Given Gfinity's revenue is receding, there's a considerable chance it will eventually need to raise more money to spend on driving growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Since it has a market capitalisation of UK£32m, Gfinity's UK£3.3m in cash burn equates to about 10% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About Gfinity's Cash Burn?

On this analysis of Gfinity's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Gfinity (3 make us uncomfortable!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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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