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Ocean Power Technologies (NASDAQ:OPTT) Will Have To Spend Its Cash Wisely

Simply Wall St

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Ocean Power Technologies (NASDAQ:OPTT) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Ocean Power Technologies

When Might Ocean Power Technologies Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In October 2019, Ocean Power Technologies had US$11m in cash, and was debt-free. Importantly, its cash burn was US$11m over the trailing twelve months. That means it had a cash runway of around 12 months as of October 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

NasdaqCM:OPTT Historical Debt, December 21st 2019

How Is Ocean Power Technologies's Cash Burn Changing Over Time?

In our view, Ocean Power Technologies doesn't yet produce significant amounts of operating revenue, since it reported just US$866k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. As it happens, the company's cash burn reduced by 11% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Ocean Power Technologies makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For Ocean Power Technologies To Raise More Cash For Growth?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Ocean Power Technologies to raise more cash in the future. 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.

Ocean Power Technologies's cash burn of US$11m is about 184% of its US$6.0m market capitalisation. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.

So, Should We Worry About Ocean Power Technologies's Cash Burn?

On this analysis of Ocean Power Technologies's cash burn, we think its cash burn reduction was reassuring, while its cash burn relative to its market cap has us a bit worried. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Notably, our data indicates that Ocean Power Technologies insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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.