We Think Ourgame International Holdings (HKG:6899) Can Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Ourgame International Holdings (HKG:6899) 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Our analysis indicates that 6899 is potentially overvalued!

When Might Ourgame International Holdings Run Out Of Money?

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 June 2022, Ourgame International Holdings had cash of CN¥658m and no debt. In the last year, its cash burn was CN¥190m. So it had a cash runway of about 3.5 years from June 2022. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

Is Ourgame International Holdings' Revenue Growing?

Given that Ourgame International Holdings 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 47% in the last year. 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.

Can Ourgame International Holdings Raise More Cash Easily?

While Ourgame International Holdings is showing solid revenue growth, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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 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' cash burn of CN¥190m is about the same as its market capitalisation of CN¥183m. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

Is Ourgame International Holdings' Cash Burn A Worry?

On this analysis of Ourgame International Holdings' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Ourgame International Holdings' situation. On another note, Ourgame International Holdings has 2 warning signs (and 1 which is potentially serious) we think you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.