Is Clean Power Hydrogen (LON:CPH2) In A Good Position To Deliver On Growth Plans?

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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, the natural question for Clean Power Hydrogen (LON:CPH2) shareholders is whether they should be concerned by its rate of cash burn. 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.

See our latest analysis for Clean Power Hydrogen

How Long Is Clean Power Hydrogen's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Clean Power Hydrogen last reported its December 2023 balance sheet in April 2024, it had zero debt and cash worth UK£8.5m. Looking at the last year, the company burnt through UK£7.1m. Therefore, from December 2023 it had roughly 14 months of cash runway. Notably, analysts forecast that Clean Power Hydrogen will break even (at a free cash flow level) in about 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. The image below shows how its cash balance has been changing over the last few years.

How Is Clean Power Hydrogen's Cash Burn Changing Over Time?

Clean Power Hydrogen didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 40% over the last year suggests some degree of prudence. 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 Clean Power Hydrogen To Raise More Cash For Growth?

While Clean Power Hydrogen is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Clean Power Hydrogen's cash burn of UK£7.1m is about 24% of its UK£30m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

So, Should We Worry About Clean Power Hydrogen's Cash Burn?

On this analysis of Clean Power Hydrogen's cash burn, we think its cash burn reduction was reassuring, while its cash burn relative to its market cap has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Clean Power Hydrogen's situation. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Clean Power Hydrogen (3 are a bit unpleasant!) that you should be aware of before investing here.

Of course Clean Power Hydrogen may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.