We Think Coast Entertainment Holdings (ASX:CEH) Needs To Drive Business Growth Carefully

editorial-team@simplywallst.com (Simply Wall St)

Mon, Dec 2, 2024, 3:19 PM 4 min read

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Coast Entertainment Holdings (ASX:CEH) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Coast Entertainment Holdings

When Might Coast Entertainment Holdings 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. As at June 2024, Coast Entertainment Holdings had cash of AU$81m and no debt. In the last year, its cash burn was AU$46m. That means it had a cash runway of around 21 months as of June 2024. Notably, analysts forecast that Coast Entertainment Holdings will break even (at a free cash flow level) in about 2 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis — ASX:CEH Debt to Equity History December 2nd 2024

How Well Is Coast Entertainment Holdings Growing?

At first glance it's a bit worrying to see that Coast Entertainment Holdings actually boosted its cash burn by 47%, year on year. The revenue growth of 3.8% gives a ray of hope, at the very least. Considering both these factors, we're not particularly excited by its growth profile. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Coast Entertainment Holdings To Raise More Cash For Growth?

While Coast Entertainment Holdings seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Coast Entertainment Holdings has a market capitalisation of AU$190m and burnt through AU$46m last year, which is 24% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Coast Entertainment Holdings' Cash Burn A Worry?

On this analysis of Coast Entertainment Holdings' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Coast Entertainment Holdings' situation. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Coast Entertainment Holdings insiders have been trading shares in the company. Click here to find out if they have been buying or selling.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies with significant insider holdings, and this list of stocks growth stocks (according to analyst forecasts)

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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.