7net11: FCF per share Snapshot Analysis: Plug Power

This analysis relates to free cash flow strength and the ability for $PLUG to be solvent related to its overall shares outstanding in lieu of no positive earnings to date or profitability. The basic premise is that a healthy business should have 3x free cash flow to pay its bills in case of liquidation. 

At first glance, Plug Power had reduced negative earnings over the last few years. They have gone from $-.60 to $ -.36 basic earnings per share in the last year or so. The question from an investment perspective: Is that reduction enough to create momentum in the near term towards profitability? Calculating Free Cash Flow per share may lend a clue:

FCF per Share = FCF average 3 - 5 yrs

                            ----------------------------

                           Total Shares Outstanding

PLUG FCF per share = - $64M

                                   ----------               

                                 332.17M shares outstanding

Plug Power has negative cash flow and its FCF per share is $-0.19 cents per total shares outstanding.  Meaning, this company has issued 332M shares of stock and in case of insolvency, shareholders would not have anything left but debt. An optimal overall Free Cash Flow for this company would be 332M shares x 3 = $996M. 332M x 1 = $332M would be respectable! 

As a result, buyers of this stock are most likely high risk speculative retail players or long term institutional investors taking a bet (shares are 42.13% institutionally owned.)  Additionally, M and A's (expansion/growth) are often reasons for low/negative FCF, and this might be the case for Plug Power, but most big institutional investors eventually like to see a path towards consistent and sustained profitability.

This analysis is a potential red flag for PLUG POWER. Coupled with its poor FCF per share value, high dilution percentage, and substantial increase in long term debt, $PLUG, founded in 1997, must get to consistent, stable profitability and show substantial positive earnings growth in order to become a more attractive investment.  

Disclosure: The author is long PYPL, ZYNGA, ELY, ABEV, FB, TCHEHY, VIAC, SIRI, VIPS, AAPL, SLGG, APPS, HUYA, DOYU, RDNT. The author wrote this article himself, and it expresses his own opinion. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article and does not anticipate taking a long position in PLUG within the next 90 days.

7net11: FCF - Free Cash Flow

I was listening to Alan Greenspan yesterday and he was discussing E/P ratios, the inverse relationship to the P/E ratio. This came up as he was giving color to the professionalism of the FED and discussing 10 - Year Treasury bond yields as a standard valuation tool when analyzing/comparing the strength of individual companies/sectors.

This led me down a research rabbit hole to FCF or Free Cash Flow. Whenever I analyze a company, I always look at the cash flow statement, especially if a company shows no income or P/E ratio.  This allows me to see if the company at some level, is building strength over time.  Not having a P/E ratio, or having an absurdly high P/E ratio, say north of 25, should not be the end of the road when deciding when/if to buy. 

As a result, I discovered this ratio: FCF (Free Cash Flow) per share = FCF/total shares outstanding.

This ratio allows for a quick snap shot to see if I should investigate more. FCF is found at the bottom of the Cash Flow Statement and should be normalized by averaging 6 - 7 years if possible.

As a result, I am able to guesstimate how much liquid cash a company has in relation to its total shares outstanding. The logic follows that a business should have 3:1 cash flow to operating expenses as a sign of balanced financial health. 

If a company has too much cash, more the 3:1, I then look to how they are investing and if they are expanding their business to stay competitive. Too much cash can be as bad as not enough cash. Too much cash may point to poor executive management and an ineffective use of cash reserves.

If the FCF is below 3:1, I do the same thing, I look at how the company is spending free cash, but also looking closer at their debt obligations and annual revenue. Also, with emerging companies, cash may be used to vastly expand operations and invest new capital. This could point towards future growth and a positive indicator towards a BUY projection.