G5 Entertainment; free-to-play games from Sweden

G5 Entertainment
Image: Salva

I am a big fan of Sweden’s gaming ecosystem, small companies (SMEs) that are quickly listed on the Nasdaq Nordic by young, enthusiastic people who are also financially disciplined.

Every month we are going to analyze some European micro-company to learn how it is managed from a financial point of view and if we can learn something to apply to our small companies, wherever we are.

So it is not an exercise to see if it is good for investment, it is a financial learning exercise.

# The company

G5 Entertainment publ AB is a Sweden-based developer and publisher of downloadable casual and free-to-play games for smartphones and tablets. The Company offers a range of game genres, such as Adventure & Hidden object and Strategy & Time management. Its product portfolio comprises two types of games: Free-to-play, providing The Secret Society, Virtual City, and Doomsday Preppers, among others, that are games based on a pay as you go model.

Available on Apple’s iPhone and iPad, Mac, devices powered by Google Android and Windows 8, tablets and e-readers.

Industry class: Electronic Gaming & Multimedia small cap (Europe)

# Financial Overview

G5 Entertainment financial overview

# Profitability

EBIT -> 9,7% (7,4% bench.)

Gross margin -> 51,7% (53,4% bench.)

Operating leverage -> 5,75

EPS -> 1,65 usd

EVA margin -> 6,2% (vs 12,9% in 2021 an -0,2% bench.)

Profit/employee -> 15,2k usd (vs 21,1k bench.)

Gross margin has fallen 10% year-on-year (61.7% to 51.7%) but the benchmark is unchanged. EBIT also fell 6.5% (16% vs 9.7%). The changes have affected margins more than the industry.

The business has the capacity to improve the previous ratios, it will depend on demand and a successful pricing strategy.

# Growth

Revenues -> 26,3%

EPS % -> -18,7%

Growth score (0-100) -> 89

Maximun natural growth -> 35%

EBIT down, Gross margin down

# Capital Allocation

ROIC -> 43% (vs 4% bench.)

FCF -> 16,8M (vs yy bench.)

FCF/rev -> 10,7%

Reinvestment rate -> 68%)

The return on assets is 10 times higher than the industry average, cash generation is not very high but ok and reinvestment is also high (although like the rest of the industry). High probability of sustaining growth and generating shareholder value.

# Working Capital management

Current ratio -> 1,7 (vs 2,9 bench.)

WC/Sales -> 9,5%

Cash convertion cycle -> 84 days (vs 75 days bench.)

# Capital structure

Debt ratio -> 30,5% (vs 29% bench.)

CF coverage ratio -> 229% (vs 12% bench.)

Interest coverage ratio -> 57,86 (vs 29 bench.)

Dividend yield -> 3,53% (vs y0 bench.)

WACC -> 7,82%

# Financial strength (scores)

Financial strength (0-9) -> 6,4

Financial health (risk) ->Strong

# Final thougths

Mr Market values the company 5,4x EV/EBITDA, very low. (on third of industry average). The number of analysts is only 1.

A very interesting company, good numbers and undercover by analysts.