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Will PowerHouse Energy Group (LON:PHE) Spend Its Cash Wisely?

Simply Wall St

We can readily understand why investors are attracted to unprofitable companies. For example, PowerHouse Energy Group (LON:PHE) shareholders have done very well over the last year, with the share price soaring by 115%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given its strong share price performance, we think it's worthwhile for PowerHouse Energy Group shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for PowerHouse Energy Group

When Might PowerHouse Energy Group 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. In June 2019, PowerHouse Energy Group had UK£140k in cash, and was debt-free. Importantly, its cash burn was UK£1.5m over the trailing twelve months. So it seems to us it had a cash runway of less than two months from June 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! The image below shows how its cash balance has been changing over the last few years.

AIM:PHE Historical Debt March 26th 2020

How Is PowerHouse Energy Group's Cash Burn Changing Over Time?

PowerHouse Energy Group didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. As it happens, the company's cash burn reduced by 22% over the last year, which suggests that management are mindful of the possibility of running out of cash. Admittedly, we're a bit cautious of PowerHouse Energy Group due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For PowerHouse Energy Group To Raise More Cash For Growth?

While PowerHouse Energy Group is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel 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 to 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.

Since it has a market capitalisation of UK£23m, PowerHouse Energy Group's UK£1.5m in cash burn equates to about 6.8% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is PowerHouse Energy Group's Cash Burn A Worry?

On this analysis of PowerHouse Energy Group's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. On another note, PowerHouse Energy Group has 6 warning signs (and 1 which is significant) we think you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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.