Metric analysis

Here’s a Crucial Metric GameStop Stock Investors Should Consider

Company fundamentals are not necessarily central to retail investors’ thesis for investing in GameStop Stock (EMG) – Get the GameStop Corporation report. On the contrary, beating short sellers at their own game seems to be a key factor – part of why GME is considered a meme stock.

However, when considering a long-term investment in a stock, the fundamentals must be important. Here’s why GameStop investors might want to consider cash and cash flow as key metrics to track.

Figure 1: Here’s a Crucial Metric GameStop Stock Investors Should Consider

(Read more about Wall Street Memes: What the latest non-delivery data on GameStop’s stock says)

‘Cash is King’

In fundamental analysis, free cash flow (FCF) is potentially the most important metric to look at when analyzing a business.

It is through cash flow that a company can fund growth and cash returns to shareholders, whether through dividends or share buybacks. A strong cash pipeline also enables acquisitions that fuel inorganic growth and improve the balance sheet by reducing debt.

For many, money is a matter of ultimate success or failure. Growth companies and their stocks can “hit flight velocity” when they become profitable and generate positive cash flow, allowing them to thrive without the need to take on more debt or invest in stocks.

Free cash flow per GME share

GameStop executive and company board member Larry Cheng recently tweeted that Free Cash Flow (FCF) is more important than Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).

In the tweet, Cheng referred to a statement from Amazon (AMZN) – Get the report from Amazon.com Inc. to its shareholders stating that free cash flow per share is the most important metric to monitor.

EBITDA, a non-GAAP measure associated with the income statement, has certain shortcomings in determining the financial health of a business. More importantly, it doesn’t provide visibility into a company’s liquidity and balance sheet strength, as accrual accounting can hamper the company’s ability to produce cold, cold and stumbling cash.

Currently, GameStop has a total cash position of over $1 billion, which is a considerable amount compared to the worst of the COVID-19 crisis (see below). GameStop was able to protect its cash balance by issuing $1.67 billion in stock last year.

But the cash generated by issuing shares is very different from the cash generated by trading. Data from the end of April 2022 shows that FCF per share was negative $10.47, the lowest since 2010.

GameStop used $300 million in cash to support operations each quarter. If left unresolved, it could put the company’s balance sheet in a difficult position. At the current rate of spending, and all things being equal, GameStop could run out of money next year.

GameStop Cash Flow Statement

Larry Cheng’s tweet suggests GameStop’s management team understands free cash flow is a priority. For now, however, the company is looking to stay afloat with additional equity financing.

Recently, at GameStop’s annual shareholders’ meeting, a increase of 8 million shares was approved as part of the 2022 incentive plan. GameStop’s management had already announced that since last year, it would strategically issue more shares. It could be part of a plan to repair the company’s balance sheet if it is able to sell shares at a high price, as it did in 2021.

Obviously, there is work to be done. GameStop’s most recent quarterly results were far from impressive. The better news is that many of the company’s struggles to generate operating cash flow appear to be related to supply chain disruptions, an external issue that could improve and at least stabilize cash burn. later this year or in 2023.

In our view, shareholders should always seek clarification from the management team on how GameStop can make rapid progress on cash flow.

(Disclaimer: This is not investment advice. The author may own one or more stocks mentioned in this report. Additionally, the article may contain affiliate links These partnerships do not influence editorial content. Thank you for supporting Wall Street Memes)