We can easily understand why investors are attracted to unprofitable companies. For example, although Amazon.com suffered losses for many years after its listing, if you had bought and held the stock since 1999, you would have made a fortune. But while the successes are well known, investors should not ignore the many unprofitable companies that simply burn through all their money and collapse.
So the natural question for Ideal power ( NASDAQ:IPWR ) shareholders should be concerned about its cash burn rate. For purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to finance its growth; its negative free cash flow. Let’s start with an examination of the business’s cash flow, relative to its cash burn.
See our latest analysis of Ideal Power
You can calculate a company’s cash footprint by dividing the amount of cash it has by the rate at which it is spending that cash. As of September 2024, Ideal Power had $19 million in cash and no debt. Importantly, her cash burn was $8.7 million over the trailing twelve months. This means that it had a money runway of about 2.1 years as of September 2024. Perhaps, this is a prudent and reasonable runway length. The image below shows how its cash balance has changed over the past few years.
In our view, Ideal Power does not yet produce significant amounts of operating income, as it only reported US$142K in the last twelve months. As a result, we think it’s a little early to focus on revenue growth, so we’ll limit ourselves to looking at how cash burn is changing over time. With a cash burn rate of 15% in the last year, it appears that the company is increasing investment in the business over time. However, the company’s true cash runway will be shorter than suggested above if expenses continue to rise. Admittedly, we are a bit wary of Ideal Power due to the lack of significant operating income. We prefer most of the stocks in this list of stocks that analysts expect to grow.
Given its cash-burning trajectory, Ideal Power shareholders may want to consider how easily it can raise more cash despite its strong track record. Companies can raise capital either through debt or equity. Many companies end up issuing new shares to finance future growth. By looking at a company’s cash burn relative to its market capitalization, we gain insight into how much shareholders would be shorted if the company had to raise enough cash to cover another year’s cash burn. .