Archosaur Games (HKG:9990) Is In A Strong Position To Grow Its Business

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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Archosaur Games (HKG:9990) shareholders should 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Archosaur Games

How Long Is Archosaur Games' 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. When Archosaur Games last reported its balance sheet in December 2021, it had zero debt and cash worth CN¥2.7b. In the last year, its cash burn was CN¥272m. So it had a cash runway of about 9.9 years from December 2021. Notably, however, analysts think that Archosaur Games will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

Is Archosaur Games' Revenue Growing?

Given that Archosaur Games 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. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 24%. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Archosaur Games Raise More Cash Easily?

Given its problematic fall in revenue, Archosaur Games shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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.

Since it has a market capitalisation of CN¥4.6b, Archosaur Games' CN¥272m in cash burn equates to about 5.9% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About Archosaur Games' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Archosaur Games is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. 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 1 warning sign for Archosaur Games that potential shareholders should take into account before putting money into a stock.

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)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.