Just because a company isn’t making money doesn’t mean the stock will go down. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
Given this risk, we thought we would examine whether Energy Vault Fund (NYSE: NRGV) shareholders should be concerned about its consumption of cash. 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. The first step is to compare its cash consumption with its cash reserves, to give us its “cash trail”.
When could Energy Vault Holdings run out of money?
A company’s cash trail is calculated by dividing its cash hoard by its cash burn. As of March 2022, Energy Vault Holdings had cash of US$304 million and no debt. Looking at last year, the company burned US$33 million. It therefore had a cash trail of approximately 9.2 years as of March 2022. Notably, however, analysts believe that Energy Vault Holdings will break even (at a free cash flow level) before that date. In this case, he may never reach the end of his cash trail. Below you can see how its liquidity has changed over time.
How is Energy Vault Holdings’ cash burn changing over time?
While it’s good to see that Energy Vault Holdings has already started generating operating revenue, last year it only produced US$43 million, so we don’t think it’s generating significant revenue at this stage. Therefore, we believe it is a little early to focus on revenue growth, so we will limit ourselves to looking at how cash burn has evolved over time. Over the past twelve months, its cash burn has actually increased by 71%. Often an increase in cash burn simply means that a company is accelerating its business development, but it should always be kept in mind that this leads to a narrowing of the cash trail. While the past is always worth studying, it is the future that matters most. So you might want to take a look at how much the business is expected to grow in the next few years.
How easily can Energy Vault Holdings raise funds?
Given its cash-burning trajectory, Energy Vault Holdings shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. Companies can raise capital either through debt or equity. Many companies end up issuing new shares to fund their future growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
With a market capitalization of $1.9 billion, Energy Vault Holdings’ cash burn of $33 million equates to approximately 1.7% of its market value. So he could almost certainly borrow a little to fund another year’s growth, or he could easily raise cash by issuing a few shares.
So should we be worried about Energy Vault Holdings’ cash burn?
It may already be obvious to you that we are relatively comfortable with the way Energy Vault Holdings is burning through its cash. In particular, we think its cash trail stands out as proof that the company is on top of spending. While its growing cash burn was not significant, the other factors mentioned in this article more than offset the weakness in this metric. A real bright spot is that analysts expect the company to break even. After looking at a range of factors in this article, we’re pretty relaxed about its cash burn, as the company appears to be in a good position to continue funding its growth. Taking a deeper dive, we spotted 2 warning signs for Energy Vault Holdings you should be aware, and one of them is a bit of a concern.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.