Here's Why We're Not Too Worried About Ceres Power Holdings' (LON:CWR) Cash Burn Situation

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Ceres Power Holdings (LON:CWR) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Ceres Power Holdings

SWOT Analysis for Ceres Power Holdings

Does Ceres Power Holdings 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. When Ceres Power Holdings last reported its balance sheet in December 2022, it had zero debt and cash worth UK£182m. Looking at the last year, the company burnt through UK£70m. That means it had a cash runway of about 2.6 years as of December 2022. Importantly, analysts think that Ceres Power Holdings will reach cashflow breakeven in 5 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 Well Is Ceres Power Holdings Growing?

Notably, Ceres Power Holdings actually ramped up its cash burn very hard and fast in the last year, by 116%, signifying heavy investment in the business. While that's concerning on it's own, the fact that operating revenue was actually down 28% over the same period makes us positively tremulous. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Ceres Power Holdings Raise More Cash Easily?

Even though it seems like Ceres Power Holdings is developing its business nicely, we still like to consider how easily it could raise more money to accelerate 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 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).

Ceres Power Holdings' cash burn of UK£70m is about 11% of its UK£643m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Ceres Power Holdings' Cash Burn Situation?

On this analysis of Ceres Power Holdings' cash burn, we think its cash runway was reassuring, while its increasing cash burn 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 Ceres Power Holdings' situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Ceres Power Holdings that investors should know when investing in the stock.

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

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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.