We Think Olema Pharmaceuticals (NASDAQ:OLMA) Can Afford To Drive Business Growth

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. 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 Olema Pharmaceuticals (NASDAQ:OLMA) shareholders should be worried about its cash burn. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Olema Pharmaceuticals

How Long Is Olema Pharmaceuticals' Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Olema Pharmaceuticals last reported its balance sheet in March 2021, it had zero debt and cash worth US$327m. Importantly, its cash burn was US$29m over the trailing twelve months. That means it had a cash runway of very many years as of March 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

How Is Olema Pharmaceuticals' Cash Burn Changing Over Time?

Olema Pharmaceuticals didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Remarkably, it actually increased its cash burn by 392% in the last year. That kind of sharp increase in spending may pay off, but is generally considered quite risky. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Olema Pharmaceuticals Raise More Cash Easily?

While Olema Pharmaceuticals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise 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. Many companies end up issuing new shares to fund future 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.

Olema Pharmaceuticals has a market capitalisation of US$1.1b and burnt through US$29m last year, which is 2.7% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Olema Pharmaceuticals' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Olema Pharmaceuticals' cash burn. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, Olema Pharmaceuticals has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course Olema Pharmaceuticals 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.

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This article by Simply Wall St is general in nature. 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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