We Think Pioneer Power Solutions (NASDAQ:PPSI) Needs To Drive Business Growth Carefully

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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Pioneer Power Solutions (NASDAQ:PPSI) shareholders is whether they should be concerned by its rate of 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.

See our latest analysis for Pioneer Power Solutions

When Might Pioneer Power Solutions Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2022, Pioneer Power Solutions had US$7.2m in cash, and was debt-free. In the last year, its cash burn was US$5.8m. That means it had a cash runway of around 15 months as of September 2022. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

How Well Is Pioneer Power Solutions Growing?

Pioneer Power Solutions boosted investment sharply in the last year, with cash burn ramping by 68%. That does give us pause, and we can't take much solace in the operating revenue growth of 4.0% in the same time frame. Taken together, we think these growth metrics are a little worrying. 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 Pioneer Power Solutions Raise Cash?

Given the trajectory of Pioneer Power Solutions' cash burn, many investors will already be thinking about how it might raise more cash in the future. 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.

Pioneer Power Solutions' cash burn of US$5.8m is about 20% of its US$28m 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.

Is Pioneer Power Solutions' Cash Burn A Worry?

On this analysis of Pioneer Power Solutions' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 1 warning sign for Pioneer Power Solutions 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)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.