U.S. Markets open in 6 hrs 58 mins
  • S&P Futures

    3,216.25
    -15.00 (-0.46%)
     
  • Dow Futures

    26,573.00
    -112.00 (-0.42%)
     
  • Nasdaq Futures

    10,748.00
    -81.00 (-0.75%)
     
  • Russell 2000 Futures

    1,444.40
    -2.30 (-0.16%)
     
  • Crude Oil

    39.60
    -0.33 (-0.83%)
     
  • Gold

    1,856.70
    -11.70 (-0.63%)
     
  • Silver

    22.14
    -0.97 (-4.20%)
     
  • EUR/USD

    1.1654
    -0.0008 (-0.0699%)
     
  • 10-Yr Bond

    0.6760
    0.0000 (0.00%)
     
  • Vix

    28.58
    +1.72 (+6.40%)
     
  • GBP/USD

    1.2693
    -0.0032 (-0.2539%)
     
  • BTC-USD

    10,326.28
    +76.81 (+0.75%)
     
  • CMC Crypto 200

    217.58
    +3.61 (+1.69%)
     
  • FTSE 100

    5,899.26
    +69.80 (+1.20%)
     
  • Nikkei 225

    23,087.82
    -258.67 (-1.11%)
     

Companies Like Pioneer Power Solutions (NASDAQ:PPSI) Can Be Considered Quite Risky

Simply Wall St

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Pioneer Power Solutions (NASDAQ:PPSI) shareholders should be worried about its 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). Let's start with an examination of the business's cash, relative to its cash burn.

View our latest analysis for Pioneer Power Solutions

How Long Is Pioneer Power Solutions's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2020, Pioneer Power Solutions had cash of US$7.0m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was US$7.6m over the trailing twelve months. Therefore, from March 2020 it had roughly 11 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

NasdaqCM:PPSI Historical Debt May 17th 2020
NasdaqCM:PPSI Historical Debt May 17th 2020

Is Pioneer Power Solutions's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Pioneer Power Solutions actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. The grim reality for shareholders is that operating revenue fell by 78% over the last twelve months, which is not what we want to see in a cash burning company. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Pioneer Power Solutions has developed its business over time by checking this visualization of its revenue and earnings history.

Can Pioneer Power Solutions Raise More Cash Easily?

Since its revenue growth is moving in the wrong direction, Pioneer Power Solutions shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Pioneer Power Solutions has a market capitalisation of US$9.4m and burnt through US$7.6m last year, which is 80% of the company's market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

Is Pioneer Power Solutions's Cash Burn A Worry?

As you can probably tell by now, we're rather concerned about Pioneer Power Solutions's cash burn. Take, for example, its cash burn relative to its market cap, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash burn relative to its market cap, its cash runway is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Pioneer Power Solutions (3 are concerning!) that you should be aware of before investing here.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.