We can readily understand why investors are attracted to unprofitable companies. By way of example, NewAmsterdam Pharma (NASDAQ:NAMS) has seen its share price rise 166% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky NewAmsterdam Pharma's cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

Does NewAmsterdam Pharma Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2024, NewAmsterdam Pharma had cash of US$423m and no debt. Importantly, its cash burn was US$155m over the trailing twelve months. Therefore, from September 2024 it had 2.7 years of cash runway. Notably, analysts forecast that NewAmsterdam Pharma will break even (at a free cash flow level) in about 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is NewAmsterdam Pharma Growing?

NewAmsterdam Pharma actually ramped up its cash burn by a whopping 91% in the last year, which shows it is boosting investment in the business. While that isa little concerning at a glance, the company has a track record of recent growth, evidenced by the impressive 79% growth in revenue, over the very same year. Considering the factors above, the company doesn't fare badly when it comes to assessing how it is changing over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can NewAmsterdam Pharma Raise Cash?

There's no doubt NewAmsterdam Pharma seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

NewAmsterdam Pharma has a market capitalisation of US$1.7b and burnt through US$155m 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.

So, Should We Worry About NewAmsterdam Pharma's Cash Burn?

As you can probably tell by now, we're not too worried about NewAmsterdam Pharma's cash burn. For example, we think its revenue growth suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. One real positive is that analysts are forecasting that the company will reach breakeven. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for NewAmsterdam Pharma that potential shareholders should take into account before putting money into a stock.

Of course NewAmsterdam Pharma 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.