We're Hopeful That Ceres Power Holdings (LON:CWR) Will Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

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. 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Ceres Power Holdings

When Might Ceres Power Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Ceres Power Holdings last reported its balance sheet in June 2022, it had zero debt and cash worth UK£222m. Looking at the last year, the company burnt through UK£43m. That means it had a cash runway of about 5.2 years as of June 2022. Importantly, though, analysts think that Ceres Power Holdings will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

How Well Is Ceres Power Holdings Growing?

Ceres Power Holdings boosted investment sharply in the last year, with cash burn ramping by 74%. While that's concerning on it's own, the fact that operating revenue was actually down 20% over the same period makes us positively tremulous. Considering both these metrics, we're a little concerned about how the company is developing. 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 Easily Can Ceres Power Holdings Raise Cash?

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. Companies can raise capital through either debt or equity. 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.

Ceres Power Holdings has a market capitalisation of UK£800m and burnt through UK£43m last year, which is 5.4% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Ceres Power Holdings' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Ceres Power Holdings' cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. An in-depth examination of risks revealed 2 warning signs for Ceres Power Holdings that readers should think about before committing capital to this stock.

Of course Ceres Power Holdings 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 that insiders are buying.

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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.