Slowly but surely, GME stocks are showing signs of improvement

GameStop (NYSE:GME) is slowly making progress in financial health. This can be seen in its latest financial results released on September 8 for the quarter ending July 31. As a result, GME stock is slowly starting to rise based on its long-term outlook. This includes a slow but steady improvement in its Free Cash Flow (FCF).

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Over the past two months, GME has risen nearly 18% (17.6%), from a low of $ 146.80 on August 4 to $ 172.68 on October 8. However, the stock peaked on June 9 at $ 302.56 and has since fallen.

In fact, GME stock appears to be trading in a range of between $ 150 and $ 218 per share over the past three months. The almost 18% increase could come from a realization that GameStop is on the path to improving the financial outlook.

Where are things at with GME Stock

GameStop reported that its second-quarter sales rose nearly 25.6% to $ 1.18 billion. However, that figure was slightly lower than in the first quarter, when sales were $ 1.27 billion for the quarter ending May 1.

Additionally, GameStop produced an adjusted net loss of $ 55 million, against one adjustment. net loss last year of $ 92 million last year. However, that improvement is overshadowed by the much smaller first quarter net loss of just $ 29.4 million.

In other words, the business is growing year over year (YoY) but not on a cumulative quarterly basis. At least that’s what it looks like under standard GAAP accounting.

Improvement in Free Cash Flow in Q2

I don’t spend a lot of time analyzing net income and EBITDA (earnings before interest, taxes, depreciation, and amortization) these days. These accounting constructs now include many non-monetary charges that almost all companies remove in their non-GAAP “adjusted” reformulations.

I focus more on cash flow and more particularly free cash flow (FCF). This is the actual amount of cash that the business generates on a quarterly basis. It includes several items not included in the accounting under GAAP of net income or EBITDA or even “adjusted” calculations. It gives a real clear vision of the company’s ability to pay its bills and generate real cash from its activity.

For example, the consolidated statement of cash flows in the second quarter earnings release shows that GameStop recorded an outflow of $ 11.5 million in operating cash flow for the second quarter. This was much better than the negative operating cash flow of $ 18.8 million in the first quarter.

However, that is not the whole story. Free cash flow takes cash flow from operations and deducts capital expenditures (“capex”) required by the business. It is generally described in the statements of cash flows as “Purchase of property, plant and equipment”. It is also an example of a type of cash expense that is neither included in net income nor even in EBITDA.

Therefore, in the second quarter, with capital expenditure of $ 13.5 million, the total FCF figure was minus $ 25 million (i.e. – $ 11.50 million – 13 , $ 50 million = – $ 25 million). This, again, was much better than the FCF T1 figure of $ 33.5 million (i.e.-$ 18.80 million – $ 14.70 million = -33.50 million dollars). In other words, in the second quarter, FCF’s loss was $ 8.5 million lower than in the first quarter.

This improvement in T2 over T1 FCF may not seem like much, but here’s why it matters. Cash flow from operations will tend to improve as sales increase. In addition, capital spending tends to remain reasonably stable or increase slowly. As a result, with higher sales, GameStop’s FCF will improve much faster.

Where that leaves GME Stock

When GameStop releases its fiscal third quarter results for the period ending October 31, analysts like myself will be taking a close look at the statement of cash flows. We want to see evidence that the company is improving its negative cash consumption and hopefully will turn positive at FCF soon.

For example, if there is an improvement in Q3 over Q2 with FCF cash losses, then we know GameStop is on a trend. In other words, a full quarterfinal improvement in FCF is not yet a trend we can completely hang our hat on. But, as I pointed out, with higher sales, most companies will tend to show improved FCF.

At this point, we can predict with more confidence where the GME stock might be heading. If the company can continue to lower its costs, the FCF will increase and its valuation could increase. I don’t want to speculate just yet on what I think the upside might be until Q3 results either confirm or deny this improving trend in the FCF.

As of the publication date, Mark R. Hake does not hold any position in any of the stocks mentioned (directly or indirectly) in the article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com publishing guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and run the Total Value of Return Guide that you can consult here.

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