- Renewable Energy
We Think Solar Alliance Energy (CVE:SOLR) Needs To Drive Business Growth Carefully
We can readily understand why investors are attracted to unprofitable companies. For example, Solar Alliance Energy (CVE:SOLR) shareholders have done very well over the last year, with the share price soaring by 222%. 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.
In light of its strong share price run, we think now is a good time to investigate how risky Solar Alliance Energy's cash burn is. 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.
View our latest analysis for Solar Alliance Energy
Does Solar Alliance Energy Have A Long Cash Runway?
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. As at September 2021, Solar Alliance Energy had cash of CA$3.2m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through CA$3.0m. That means it had a cash runway of around 13 months as of September 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.
How Well Is Solar Alliance Energy Growing?
It was quite stunning to see that Solar Alliance Energy increased its cash burn by 1,076% over the last year. While that's concerning on it's own, the fact that operating revenue was actually down 5.7% over the same period makes us positively tremulous. Considering these two factors together makes us nervous about the direction the company seems to be heading. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Solar Alliance Energy is building its business over time.
How Hard Would It Be For Solar Alliance Energy To Raise More Cash For Growth?
Since Solar Alliance Energy can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. 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.
Solar Alliance Energy's cash burn of CA$3.0m is about 7.4% of its CA$40m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
So, Should We Worry About Solar Alliance Energy's Cash Burn?
On this analysis of Solar Alliance Energy's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Solar Alliance Energy (2 are a bit concerning!) that you should be aware of before investing here.
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Solar Alliance Energy
Solar Alliance Energy Inc., together with its subsidiaries, provides energy solutions.
Weak fundamentals or lack of information.