Here's Why We're Not At All Concerned With Ballard Power Systems's (TSE:BLDP) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Ballard Power Systems (TSE:BLDP) stock is up 203% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Ballard Power Systems's cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Ballard Power Systems

Does Ballard Power Systems Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In March 2020, Ballard Power Systems had US$182m in cash, and was debt-free. Importantly, its cash burn was US$29m over the trailing twelve months. That means it had a cash runway of about 6.2 years as of March 2020. Notably, however, analysts think that Ballard Power Systems will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

How Well Is Ballard Power Systems Growing?

We reckon the fact that Ballard Power Systems managed to shrink its cash burn by 36% over the last year is rather encouraging. And considering that its operating revenue gained 24% during that period, that's great to see. It seems to be growing nicely. 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 Ballard Power Systems To Raise More Cash For Growth?

While Ballard Power Systems seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Ballard Power Systems's cash burn of US$29m is about 1.2% of its US$2.4b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About Ballard Power Systems's Cash Burn?

As you can probably tell by now, we're not too worried about Ballard Power Systems's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its cash burn reduction wasn't quite as good, but was still rather encouraging! One real positive is that analysts are forecasting that the company will reach breakeven. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Taking an in-depth view of risks, we've identified 3 warning signs for Ballard Power Systems that you should be aware of before investing.

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

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