Here's Why We're Not Too Worried About Scout Gaming Group's (STO:SCOUT) 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, Scout Gaming Group (STO:SCOUT) shareholders have done very well over the last year, with the share price soaring by 238%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for Scout Gaming Group shareholders to consider whether its cash burn is concerning. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Scout Gaming Group

Does Scout Gaming Group Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Scout Gaming Group last reported its balance sheet in December 2020, it had zero debt and cash worth kr73m. In the last year, its cash burn was kr56m. So it had a cash runway of approximately 16 months from December 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

How Well Is Scout Gaming Group Growing?

Some investors might find it troubling that Scout Gaming Group is actually increasing its cash burn, which is up 6.3% in the last year. Given that its operating revenue increased 131% in that time, it seems the company has reason to think its expenditure is working well to drive growth. If revenue is maintained once spending on growth decreases, that could well pay off! We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Scout Gaming Group is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can Scout Gaming Group Raise Cash?

Even though it seems like Scout Gaming Group is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Scout Gaming Group's cash burn of kr56m is about 5.4% of its kr1.0b market capitalisation. 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.

Is Scout Gaming Group's Cash Burn A Worry?

On this analysis of Scout Gaming Group's cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, Scout Gaming Group has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

Of course Scout Gaming Group may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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