As the CN¥661.95m market cap 500com Limited (NYSE:WBAI) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Additional cash raising may dilute the value of your shares, and since 500.com is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined 500.com’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. See our latest analysis for 500.com
What is cash burn?
With a negative operating cash flow of -CN¥202.20m, 500.com is chipping away at its CN¥592.23m cash reserves in order to run its business. The riskiest factor facing investors of 500.com is the potential for the company to run out of cash without the ability to raise more money. 500.com operates in the casinos and gaming industry, which delivered positive earnings in the past year. This means, on average, its industry peers are profitable. 500.com runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will 500.com need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for 500.com to continue its operations. In this case I’ve only accounted for sales, general and admin (SG&A) expenses, and basic R&D expenses incurred within this year. Opex (excluding one-offs) grew by 9.26% over the past year, which is relatively reasonable for a small-cap company. This means that, if 500.com continues to grow its opex at this rate, given how much money it currently has in the bank, it will need to raise capital again in 1.4 years. Though, if 500.com kept its opex level at CN¥404.86m, it will still come to market within the next couple of years, but slightly later. Although this is a relatively simplistic calculation, and 500.com may reduce its costs or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the 500.com’s operation is, and when things may have to change.
Next Steps:This analysis isn’t meant to deter you from buying 500.com, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its current opex growth rate and its level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should 500.com come to market to fund its growth. This is only a rough assessment of financial health, and I’m sure WBAI has company-specific issues impacting its cash management decisions. I suggest you continue to research 500.com to get a better picture of the company by looking at:
- Historical Performance: What has WBAI’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on 500.com’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.