- United States
We're Hopeful That Allied Gaming & Entertainment (NASDAQ:AGAE) Will Use Its Cash Wisely
We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Allied Gaming & Entertainment (NASDAQ:AGAE) 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. Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for Allied Gaming & Entertainment
When Might Allied Gaming & Entertainment 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. In September 2022, Allied Gaming & Entertainment had US$84m in cash, and was debt-free. Looking at the last year, the company burnt through US$11m. Therefore, from September 2022 it had 7.8 years of cash runway. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Allied Gaming & Entertainment Growing?
At first glance it's a bit worrying to see that Allied Gaming & Entertainment actually boosted its cash burn by 28%, year on year. But looking on the bright side, its revenue gained by 79%, lending some credence to the growth narrative. Of course, with spend going up shareholders will want to see fast growth continue. 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 Allied Gaming & Entertainment is building its business over time.
How Easily Can Allied Gaming & Entertainment Raise Cash?
There's no doubt Allied Gaming & Entertainment seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund 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.
Allied Gaming & Entertainment has a market capitalisation of US$46m and burnt through US$11m last year, which is 24% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
How Risky Is Allied Gaming & Entertainment's Cash Burn Situation?
On this analysis of Allied Gaming & Entertainment's cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. 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 an in-depth view of risks, we've identified 1 warning sign for Allied Gaming & Entertainment that you should be aware of before investing.
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)
Valuation is complex, but we're helping make it simple.
Find out whether Allied Gaming & Entertainment is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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.
Allied Gaming & Entertainment
Allied Gaming & Entertainment Inc. provides entertainment and gaming products worldwide.
Flawless balance sheet with weak fundamentals.