Image source: Getty Images.

FuelCell Energy (FCEL -7.60%), a leader in providing fuel-cell systems to the stationary power market, believes that it's driving ever-closer to profitability -- something that's evaded the company since its IPO nearly 25 years ago. Let's give the company a thorough look to see if management deserves praise for successfully navigating the company through a nascent, unproven market.

Earnings ebb and flow

FuelCell Energy -- like its hydrogen-happy brethren -- has consistently failed to prove that its alternative-power endeavors can be a lucrative enterprise. This could be tolerable if there were indications that the company was proceeding in the right direction. Unfortunately, there's plenty of cause for concern when we look at the income statement.

Revenue (millions) $163  $180  $188 $121 $123
Gross profit (millions) $13 $14 $7 $0 ($13)
Gross profit margin 7.8% 7.6% 3.8% 0.4% (10.3%)
Operating income (millions) ($29) ($27) ($30) ($32) ($46)
Operating margin (17.7%) (15.1%) (15.9%) (26.6%) (37.3%)
EBITDA (millions) ($22) ($30) ($27) ($28) ($37)

Data source: Morningstar.

For one, a growth company like FuelCell, should be showing growth. Instead, the company has reported declining revenue for the past two years, suggesting that market adoption of its fuel-cell solutions for stationary power applications is questionable. In terms of material handling equipment (MHE), the market is much more receptive to fuel-cell solutions. Plug Power (PLUG -4.93%), a fuel cell company focused on MHE solutions, has reported revenue growth at a compound annual growth rate of 31.8% from 2011 to 2015.

The company's ability to rein in its cost of goods sold provides some hope. Despite lagging growth in 2015, the company has managed to expand its gross margins and show a gross profit -- something Plug Power has consistently failed to accomplish.

Controlling operating expenses, on the other hand, is a challenge FuelCell has yet to overcome. Growing 26% since 2011, the company's operating expenses are outpacing improvement in the company's operating margin. During the company's recent conference call, management attributed the 16% increase in operating expenses to increased costs associated with "bid and proposal activity as well as some product enhancements that we are working on on the R&D line." In all likelihood, the company's bid and proposal activity won't slow down in the coming years. As the company continues work on its solid oxide fuel cell and high-efficiency fuel-cell, the R&D costs are also likely to grow.

At the end of 2014, management raised investors' hopes that the new year would bring glimmers of profitability with it. "With a more diversified sales mix in 2015, we expect margins will continue to expand and we are targeting EBITDA breakeven on a quarterly basis later in the year," management states.

To investors' chagrin, though, management missed in its forecast. Instead of breaking even, management fell $22 million short. And there's no indication that 2016 will bring much better news.

Flowing in the wrong direction

So far, the company's financial health seems tenuous. Will its ability to generate operational cash to cover spending provide some reassurance? It seems the answer is no.

Since fiscal 2013 -- when it reported $16.7 million in negative cash from operations -- the company's cash outflow has grown a whopping 166%. For fiscal 2015, the company reported $44.3 million in negative cash from operations.

Image source: Getty Images.

And, following the second quarter, there are signs that 2016 won't shape up to be any better.

For the first six months of fiscal 2016, the company's cash outflow has amounted to $21 million; for the same period of fiscal 2015, the company reported $12 million in cash outflow. If the company's cash outflow for the second half of the year matches that of the same period last year, the company will report approximately $53 million in negative cash from operations for fiscal 2016 -- a 20% drop year over year. 

A bitter pill to swallow

Having nearly finished this checkup, we have found some major causes for concern. Now let's turn to the balance sheet to see if this company deserves a spot in the ER.

Unlike the aforementioned dour findings, the company's debt position doesn't raise a red flag. But before we breathe a sigh of relief, let's take a closer look. 

FuelCell Energy, like Plug Power, isn't generating operational cash to keep the lights on. And, like Plug Power, FuelCell isn't relying on weighing itself down with debt to keep things going. Plug Power finished fiscal 2015 with $68 million in cash and without any net debt; likewise, FuelCell finished fiscal 2015 with $59 million in cash and without any net debt.

How does the company do it? That's the bitter part: dilution. The company owes its lack of net debt to the $106 million it raised in equity offerings during 2014: 14.6 million shares issued to NRG Energy for $35 million in proceeds, a public offering of 25.3 million shares it issued for net proceeds of $29.5 million, and open market sales of stock for $41.3 million.

But the dilution extends for longer than just the past couple of years. Over the past five years, the company's share count has increased 129% -- from 11.6 million shares outstanding in January 2012 (adjusted for the 1-for-12 reverse stock split in December 2015) to 26.6 million at the end of 2015. 

The verdict

Following a thorough look at the company's profitability, cash flow, and debt position, we find that FuelCell is in anything but sound financial health. The company's history of lagging revenue growth and the absence of positive operating income immediately raise concerns. Fanciful thoughts of billions in revenue following the partnership with ExxonMobil are worth a pair of birds in the bush.

FuelCell's failure to improve its ability to show improvement in generating operation cash further cast the company's financial health in a negative light. Although it's reassuring that the company isn't drowning in debt, investors should recognize that it comes at their own expense as they continually suffer from dilution. And while the company struggles to produce operational cash, there's every reason to suspect that they will continue to suffer from dilution.

Far from earning a clean bill of health, FuelCell, in fact, has a long road ahead of it if it wishes to leave its next financial checkup with a lollipop and balloon.