As the US$736.78M market cap 500com Limited (NYSE:WBAI) released another year of negative earnings, investors may be on edge waiting for breakeven. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that 500.com is spending more money than it earns, it will need to fund its expenses via external sources of capital. 500.com may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question. See our latest analysis for 500.com
What is cash burn?
500.com currently has CN¥649.12M in the bank, with negative cash flows from operations of -CN¥114.34M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. The measure of how fast 500.com goes through its cash reserves over time is called the cash burn rate. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. 500.com operates in the casinos and gaming industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating 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?
500.com has to pay its employees and other necessities such as rent and admin costs in order to keep its business running. These costs are called operational expenses, which is sometimes shortened to opex. In this calculation I’ve only included recurring sales, general and admin (SG&A) expenses, and R&D expenses occured within they year. Over the last twelve months, opex (excluding one-offs) increased by 9.93%, which is fairly normal for a small-cap. My cash burn analysis suggests that 500.com has a cash runway of 1.6 years, given its current level of cash holdings. This may mean it will be coming to market sooner than shareholders would like. This is also the case if 500.com maintains its opex level of CN¥402.40M, without growth, going forward. Even though this is analysis is fairly basic, and 500.com still can cut its overhead in the near future, or raise debt capital instead of coming to equity markets, the outcome of this analysis still helps us understand how sustainable the 500.com’s operation is, and when things may have to change.
Next Steps:Loss-making companies are a risky play, especially those that are still ramping up its opex. Though, this shouldn’t discourage you from considering entering the stock in the future. Now you know that if the company was to continue to grow its opex at its current rate, it will not be able to sustain its operations given the current level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should 500.com come to market to fund its operations. I admit this is a fairly basic analysis for WBAI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research 500.com to get a more holistic view 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.