There is no doubt that it is possible to make money by owning shares of unprofitable companies. For example, although Amazon.com posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. But while history boasts of these rare successes, those who fail are often forgotten; who remembers Pets.com?
So should VMP Pharmaceuticals (NASDAQ: PMVP) are shareholders worried about its consumption of cash? 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. Let’s start with a review of the company’s cash flow, relative to its cash burn.
When could PMV Pharmaceuticals run out of money?
You can calculate a company’s cash trail by dividing the amount of cash it has on hand by the rate at which it spends that money. When PMV Pharmaceuticals released its last balance sheet in June 2022, it had no debt and cash worth $277 million. Last year, its cash burn was $61 million. It therefore had a cash trail of approximately 4.5 years as of June 2022. A cash trail of this length gives the company the time and space it needs to grow its business. You can see how his cash balance has changed over time in the image below.
How is PMV Pharmaceuticals’ cash burn changing over time?
Since PMV Pharmaceuticals is not currently generating revenue, we consider it to be an early-stage company. So, while we can’t look to sales to understand growth, we can look at cash burn trends to understand spending trends over time. Over the past year, its cash burn has actually increased by 51%. Often an increase in cash burn simply means a company is accelerating its business development, but always keep in mind that this reduces the cash trail. Obviously, however, the crucial factor is whether the company will expand its business in the future. So you might want to take a look at how much the business is expected to grow in the next few years.
Can PMV Pharmaceuticals raise more money easily?
Given its cash-burning trajectory, PMV Pharmaceuticals shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. Issuing new shares or going into debt are the most common ways for a listed company to raise more funds for its business. Many companies end up issuing new shares to fund their future growth. By looking at a company’s cash burn relative to its market cap, we get insight into how much of a shareholder base would be diluted if the company needed to raise enough cash to cover a company’s cash burn. another year.
PMV Pharmaceuticals has a market capitalization of $515 million and spent $61 million last year, or 12% of the company’s market value. As a result, we risk the company being able to raise more cash for growth without too much trouble, but at the cost of some dilution.
How risky is PMV Pharmaceuticals’ cash burn situation?
As you can probably tell by now, we’re not too worried about PMV Pharmaceuticals’ cash burn. In particular, we think its cash trail stands out as proof that the company is on top of spending. While its growing cash burn gives us reason to pause, the other metrics we’ve discussed in this article paint an overall positive picture. Given all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we think shareholders should keep an eye on how it’s doing. On a different note, we conducted a thorough investigation of the company and identified 3 warning signs for PMV Pharmaceuticals (2 doesn’t sit too well with us!) which you should be aware of before investing here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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