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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Ceres Power Holdings (LON:CWR) 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
View our latest analysis for Ceres Power Holdings
When Might Ceres Power Holdings Run Out Of Money?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Ceres Power Holdings last reported its balance sheet in December 2021, it had zero debt and cash worth UK£245m. In the last year, its cash burn was UK£32m. That means it had a cash runway of about 7.6 years as of December 2021. Notably, however, analysts think that Ceres Power Holdings will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.
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 157%, signifying heavy investment in the business. On the bright side, at least operating revenue was up 46% over the same period, giving some cause for hope. Considering both these factors, we're not particularly excited by its growth profile. 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.
Can Ceres Power Holdings Raise More Cash Easily?
We are certainly impressed with the progress Ceres Power Holdings has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.