We can readily understand why investors are attracted to unprofitable companies. By way of example, DiaMedica Therapeutics (NASDAQ:DMAC) has seen its share price rise 108% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for DiaMedica Therapeutics shareholders to consider whether its cash burn is concerning. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Does DiaMedica Therapeutics Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When DiaMedica Therapeutics last reported its September 2024 balance sheet in November 2024, it had zero debt and cash worth US$50m. In the last year, its cash burn was US$19m. Therefore, from September 2024 it had 2.6 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.

How Is DiaMedica Therapeutics' Cash Burn Changing Over Time?

Because DiaMedica Therapeutics isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 9.8%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For DiaMedica Therapeutics To Raise More Cash For Growth?

Since its cash burn is increasing (albeit only slightly), DiaMedica Therapeutics shareholders should still be mindful of the possibility it will require more cash in the future. 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.

DiaMedica Therapeutics has a market capitalisation of US$217m and burnt through US$19m last year, which is 9.0% of the company's market value. 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 DiaMedica Therapeutics' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way DiaMedica Therapeutics is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking a deeper dive, we've spotted 4 warning signs for DiaMedica Therapeutics you should be aware of, and 2 of them are potentially serious.

Of course DiaMedica Therapeutics may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.