Just because a business does not make any money, does not mean that the stock will go down. Indeed, Ballard Power Systems (TSE:BLDP) stock is up 157% in the last year, providing strong gains for shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So notwithstanding the buoyant share price, we think it’s well worth asking whether Ballard Power Systems’s cash burn is too risky In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
When Might Ballard Power Systems Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Ballard Power Systems last reported its balance sheet in September 2019, it had zero debt and cash worth US$153m. In the last year, its cash burn was US$29m. Therefore, from September 2019 it had 5.4 years of cash runway. Notably, however, analysts think that Ballard Power Systems will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. 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 33% over the last year is rather encouraging. But the revenue dip of 14% in the same period was a bit concerning. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For Ballard Power Systems To Raise More Cash For Growth?
There’s no doubt Ballard Power Systems seems to be in a fairly good position, when it comes to managing its cash burn, but even if it’s only hypothetical, it’s always worth asking how easily it could raise more money to fund growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Ballard Power Systems’s cash burn of US$29m is about 1.3% of its US$2.3b market capitalisation. So it could almost certainly just borrow a little to fund another year’s growth, or else easily raise the cash by issuing a few shares.
So, Should We Worry About Ballard Power Systems’s Cash Burn?
It may already be apparent to you that we’re relatively comfortable with the way Ballard Power Systems is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. One real positive is that analysts are forecasting that the company will reach breakeven. Looking at all the measures in this article, together, we’re not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Notably, our data indicates that Ballard Power Systems insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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