Ourgame International Holdings (HKG:6899) Is In A Good Position To Deliver On Growth Plans

Just because a business does not make any money, does not mean that the stock will go down. 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 should Ourgame International Holdings (HKG:6899) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Ourgame International Holdings

How Long Is Ourgame International Holdings' Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2022, Ourgame International Holdings had cash of CN¥624m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was CN¥86m. So it had a cash runway of about 7.2 years from December 2022. 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.

How Well Is Ourgame International Holdings Growing?

We reckon the fact that Ourgame International Holdings managed to shrink its cash burn by 29% over the last year is rather encouraging. And arguably the operating revenue growth of 51% was even more impressive. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how Ourgame International Holdings is building its business over time.

How Hard Would It Be For Ourgame International Holdings To Raise More Cash For Growth?

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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 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¥295m and burnt through CN¥86m last year, which is 29% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About Ourgame International Holdings' Cash Burn?

As you can probably tell by now, we're not too worried about Ourgame International Holdings' cash burn. For example, we think its revenue growth suggests that the company is on a good path. Although its cash burn relative to its market cap does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking a deeper dive, we've spotted 2 warning signs for Ourgame International Holdings you should be aware of, and 1 of them is potentially serious.

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. 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.