We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether NewAmsterdam Pharma (NASDAQ:NAMS) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

When Might NewAmsterdam Pharma Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at March 2024, NewAmsterdam Pharma had cash of US$481m and no debt. Looking at the last year, the company burnt through US$164m. So it had a cash runway of about 2.9 years from March 2024. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

Is NewAmsterdam Pharma's Revenue Growing?

Given that NewAmsterdam Pharma actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Sadly, operating revenue actually dropped like a stone in the last twelve months, falling 89%, which is rather concerning. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can NewAmsterdam Pharma Raise More Cash Easily?

Given its problematic fall in revenue, NewAmsterdam Pharma shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and 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.

NewAmsterdam Pharma's cash burn of US$164m is about 9.5% of its US$1.7b market capitalisation. 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.

How Risky Is NewAmsterdam Pharma's Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought NewAmsterdam Pharma's cash runway was relatively promising. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking an in-depth view of risks, we've identified 2 warning signs for NewAmsterdam Pharma that you should be aware of before investing.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies with significant insider holdings, and this list of stocks growth stocks (according to analyst forecasts)

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com