Companies Like Ceres Power Holdings (LON:CWR) Are In A Position To Invest In Growth

Simply Wall St · 09/15/2023 05:08

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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So should Ceres Power Holdings (LON:CWR) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Ceres Power Holdings

When Might Ceres Power Holdings Run Out Of Money?

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. In December 2022, Ceres Power Holdings had UK£182m in cash, and was debt-free. Looking at the last year, the company burnt through UK£70m. So it had a cash runway of about 2.6 years from December 2022. That's decent, giving the company a couple years to develop its business. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. Depicted below, you can see how its cash holdings have changed over time.

LSE:CWR Debt to Equity History September 15th 2023

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. As if that's not bad enough, the operating revenue also dropped by 28%, making us very wary indeed. 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. 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Ceres Power Holdings has a market capitalisation of UK£723m and burnt through UK£70m last year, which is 9.6% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

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. 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. 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, 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)