Here's Why We're Watching Ourgame International Holdings' (HKG:6899) Cash Burn Situation

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Ourgame International Holdings (HKG:6899) shareholders be worried about its cash burn? 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 Ourgame International Holdings

When Might Ourgame International Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Ourgame International Holdings last reported its balance sheet in December 2021, it had zero debt and cash worth CN¥659m. Looking at the last year, the company burnt through CN¥121m. Therefore, from December 2021 it had 5.4 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Ourgame International Holdings Growing?

Ourgame International Holdings actually ramped up its cash burn by a whopping 70% in the last year, which shows it is boosting investment in the business. On the bright side, at least operating revenue was up 30% over the same period, giving some cause for hope. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how Ourgame International Holdings is growing revenue over time by checking this visualization of past revenue growth.

Can Ourgame International Holdings Raise More Cash Easily?

We are certainly impressed with the progress Ourgame International Holdings has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund 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. 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.

Ourgame International Holdings has a market capitalisation of CN¥143m and burnt through CN¥121m last year, which is 85% of the company's market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

How Risky Is Ourgame International Holdings' Cash Burn Situation?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Ourgame International Holdings' cash runway was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Ourgame International Holdings (of which 1 is concerning!) you should know about.

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. 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.