We're Hopeful That Forma Therapeutics Holdings (NASDAQ:FMTX) Will Use Its Cash Wisely

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Forma Therapeutics Holdings (NASDAQ:FMTX) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Forma Therapeutics Holdings

Does Forma Therapeutics Holdings Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Forma Therapeutics Holdings last reported its balance sheet in September 2021, it had zero debt and cash worth US$513m. Importantly, its cash burn was US$125m over the trailing twelve months. So it had a cash runway of about 4.1 years from September 2021. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Forma Therapeutics Holdings Growing?

At first glance it's a bit worrying to see that Forma Therapeutics Holdings actually boosted its cash burn by 33%, year on year. In light of that, the flat year on year operating leverage is a bit off-putting. In light of the data above, we're fairly sanguine about the business growth trajectory. 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.

Can Forma Therapeutics Holdings Raise More Cash Easily?

Even though it seems like Forma Therapeutics Holdings is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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. 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.

Forma Therapeutics Holdings' cash burn of US$125m is about 15% of its US$831m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is Forma Therapeutics Holdings' Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Forma Therapeutics Holdings' cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Forma Therapeutics Holdings (2 are a bit concerning!) that you should be aware of before investing here.

Of course Forma Therapeutics Holdings 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 that insiders are buying.

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.

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