We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. 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.
So, the natural question for Devolver Digital (LON:DEVO) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. Let’s start with an examination of the business’ cash, relative to its cash burn.
Check out our latest analysis for Devolver Digital
When Might Devolver Digital Run Out Of Money?
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In December 2022, Devolver Digital had US$79m in cash, and was debt-free. Looking at the last year, the company burnt through US$2.4m. So it had a very long cash runway of many years from December 2022. 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.
Is Devolver Digital’s Revenue Growing?
Given that Devolver Digital 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. It’s nice to see that operating revenue was up 37% in the last year. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For Devolver Digital To Raise More Cash For Growth?
Notwithstanding Devolver Digital’s revenue growth, it is still important to consider how it could raise more money, if it needs to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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 comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Devolver Digital has a market capitalisation of US$161m and burnt through US$2.4m last year, which is 1.5% of the company’s market value. So it could almost certainly just borrow a little to fund another year’s growth, or else easily raise the cash by issuing a few shares.
How Risky Is Devolver Digital’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about Devolver Digital’s cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even its revenue growth was very encouraging. 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. For us, it’s always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Devolver Digital CEO receives in total remuneration.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
How Midsize Organizations Can Generate Electronic Transformation
Breaking Down Barriers In The Customer Journey By Accelerating Electronic Transformation
Potbelly notes gains from ‘digital kitchen’ rollout