We're Not Very Worried About Ceres Power Holdings' (LON:CWR) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Ceres Power Holdings ( LON:CWR ) shareholders 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See 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 2023, it had zero debt and cash worth UK£161m. Looking at the last year, the company burnt through UK£64m. Therefore, from June 2023 it had 2.5 years of cash runway. 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. Depicted below, you can see how its cash holdings have changed over time.

As a recent development, the company is anticipating additional cash inflow through a recent deal signed with Delta Electronics. This influx of funds may positively impact the company's financial position and further extend its runway

How Well Is Ceres Power Holdings Growing?

At first glance it's a bit worrying to see that Ceres Power Holdings actually boosted its cash burn by 49%, year on year. To be fair, given that fact it's hardly inspiring to see that the operating revenue was flat year on year. 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. 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. 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).

Ceres Power Holdings' cash burn of UK£64m is about 15% of its UK£414m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted, should the company require to raise cash.

Is Ceres Power Holdings' Cash Burn A Worry?

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. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Ceres Power Holdings (1 shouldn't be ignored!) that you should be aware of before investing here.

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.