Yahoo Finance Dilution Ahead For Emerge Gaming Limited (ASX:EM1) Shareholders?
As the AU$11m market cap Emerge Gaming Limited (ASX:EM1) 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. Selling new shares may dilute the value of existing shares on issue, and since Emerge Gaming is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Emerge Gaming’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
Check out our latest analysis for Emerge Gaming
What is cash burn?
Emerge Gaming currently has AU$3.2m in the bank, with negative free cash flow of -AU$2.1m. The biggest threat facing Emerge Gaming investors is the company going out of business when it runs out of money and cannot raise any more capital. Emerge Gaming operates in the interactive home entertainment industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Emerge Gaming faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.
When will Emerge Gaming need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Emerge Gaming has to spend each year in order to keep its business running.
In Emerge Gaming’s case, its cash outflows fell by 54% last year, which may signal the company moving towards a more sustainable level of expenses. Though, if the company kept its cash burn level at -AU$2.1m, it may not need to raise capital for another 1.5 years. Even though this is analysis is fairly basic, and Emerge Gaming still can cut its overhead further, or open a new line of credit instead of issuing new shares, this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
Next Steps:
This analysis isn’t meant to deter you from Emerge Gaming, 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 level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Emerge Gaming raise capital to fund its growth. Keep in mind I haven't considered other factors such as how EM1 is expected to perform in the future. You should continue to research Emerge Gaming to get a more holistic view of the company by looking at:
Historical Performance: What has EM1'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 Emerge Gaming’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.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
