Ceres Power Holdings PLC (LON: CWR) shares have a number of interesting attributes to them. As we’ve noted before about Ceres Power their field of solid oxide fuel cells is an interesting technological one. Possibly underrated as a solution to climate change. We’ve also noted that there might be a revaluation of Ceres Power as a result.
However, when considering a company designing and building a new tech – which is what Ceres is doing even if SOFC’s have been around for a century and a half – it’s also necessary to think about whether they’ve got enough money. Actual cold, hard, cash because that’s the thing that has to be spent in order to gain that market-leading technological advance which can then be exploited.
Traditionally we call this the burn rate. What’s the cash outflow each year as compared to the stock of cash that’s available to be spent? We can call these more formal things, like negative cash flow, or investment rate, and so on, but that’s really what is being measured. How many years’ cash do they have to keep investing?
At Ceres Power, last year’s cash burn was £25 million. The cash balance was £261 at balance sheet time. So, we might say there’s a decade’s worth of money there. Which seems plenty to be going on with to be fair.
That’s not the end of it though. We also need to think about what management is thinking about spending. For we are trying to predict the future here. Last year the cash burn increased by 82% which might cause fright. But then that’s also what it’s there for, to be spent on growing and developing the business. Revenue also grew in that period, by 71%, so while the gap – that cash burn – is growing it is at least producing the thing desired, a larger company.
That’s also not the end of the story. At Ceres Power, as with any other company in this situation, it’s not just cash that matters. It’s the ability to raise cash that needs to be added to the calculation. So, what’s the cash burn compared to the equity valuation at Ceres Power? Ceres is valued at some £1.2 billion. £25 million is about 2% of that give or take a bit. So, if Ceres were to issue new equity (let alone borrow, which it almost certainly could) then dilution to cover one year’s cash burn would be about 2%. That’s well manageable.
Of course, none of this shows that Ceres Power is a great investment, nor that it’s a bad one. It’s just that the cash burn rate is something we need to tick off our list of things we’ve considered. Barring some violent change in policy or circumstances, Ceres Power looks well funded.
Now on to the more difficult question of whether we think the plan as a whole is going to succeed.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.