Plug Power shares rose 13.90% to $2.54 on Tuesday after the company registered record revenue in the second quarter. The fuel cell maker reiterated its full-year revenue guidance of $100 million. However, its fundamentals – except cash flow quality – remain weak, says Jefferson Research. The research firm analyzed the stock based on five parameters: earnings quality, operating efficiency, balance sheet quality, cash flow quality, and valuation. Jefferson maintained its Sell rating on the stock.

Plug Power Inc Earnings Quality Still Poor: Jefferson

A more accurate picture of Plug Power’s earnings quality

Jefferson said sometimes companies include certain items that inflate reported earnings, but the cash flow supporting the earnings may be weak. The research firm adjusts for such anomalies to give a more accurate picture of Plug Power’s earnings quality. Jefferson said the Latham, New York-based company’s earnings quality remained “weakest.” Even though the quality of reported net income improved in Q1, the operating cash flow fell from -$9 million to -$13 million.

Jefferson rates Plug Power’s cash flow quality as “strong.” The annual operating cash flow stood at -$40 million, but the adjusted feature was $57 million less than reported. Plug Power’s operating efficiency was “weakest.” The return on invested capital improved from -75.6% to -15.7%,but gross margin, net margin, and asset turnover deteriorated.

Why is Plug Power’s balance sheet quality ‘weak’?

Jefferson Research measured Plug Power’s balance sheet quality by analyzing its current ratio, quick ratio, cash position, accounts receivable days, and inventory days. The research firm notes that Plug Power’s balance sheet quality remains “weak” due to a weakness in cash position and inventory days.

The fuel cell company’s accounts receivable days sales outstanding (AR DSOs) showed an improvement from 90 to 41 days. But it was offset by the deterioration of inventory days from 132 to 163 days. The higher inventory days mean Plug Power has lengthened the number of days inventory is held before it is sold to customers. An increase in inventory days requires more working capital.

Plug Power aims to become a $500 million company in terms of revenue by 2020. Its shares fell 0.39% to $2.53 in pre-market trading Wednesday.