We're Hopeful That Centerenergo (UKR:CEEN) Will Use Its Cash Wisely

By
Simply Wall St
Published
February 25, 2022
UKR:CEEN
Source: Shutterstock

We can readily understand why investors are attracted to unprofitable companies. 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. 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 Centerenergo (UKR:CEEN) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Centerenergo

Does Centerenergo 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. As at September 2021, Centerenergo had cash of ₴781m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was ₴522m. That means it had a cash runway of around 18 months as of September 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
UKR:CEEN Debt to Equity History February 25th 2022

Is Centerenergo's Revenue Growing?

Given that Centerenergo actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. It's nice to see that operating revenue was up 39% in the last year. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Centerenergo is building its business over time.

How Easily Can Centerenergo Raise Cash?

Notwithstanding Centerenergo's revenue growth, it is still important to consider how it could raise more money, if it needs to. 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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of ₴3.0b, Centerenergo's ₴522m in cash burn equates to about 18% of its market value. 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 Centerenergo's Cash Burn Situation?

The good news is that in our view Centerenergo's cash burn situation gives shareholders real reason for optimism. Not only was its cash runway quite good, but its revenue growth was a real positive. 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 Centerenergo's situation. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Centerenergo that potential shareholders should take into account before putting money into a 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)

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.