Stock Analysis

Companies Like Aeterna Zentaris (TSE:AEZS) Can Afford To Invest In Growth

  •  Updated
TSX:AEZS
Source: Shutterstock

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Aeterna Zentaris (TSE:AEZS) shareholders have done very well over the last year, with the share price soaring by 108%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So notwithstanding the buoyant share price, we think it's well worth asking whether Aeterna Zentaris' cash burn is too risky. 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.

Check out our latest analysis for Aeterna Zentaris

When Might Aeterna Zentaris Run Out Of Money?

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 Aeterna Zentaris last reported its balance sheet in December 2020, it had zero debt and cash worth US$24m. In the last year, its cash burn was US$4.1m. That means it had a cash runway of about 5.9 years as of December 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
TSX:AEZS Debt to Equity History March 29th 2021

How Is Aeterna Zentaris' Cash Burn Changing Over Time?

Whilst it's great to see that Aeterna Zentaris has already begun generating revenue from operations, last year it only produced US$3.7m, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Notably, its cash burn was actually down by 61% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Aeterna Zentaris is growing revenue over time by checking this visualization of past revenue growth.

Can Aeterna Zentaris Raise More Cash Easily?

There's no doubt Aeterna Zentaris' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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. 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.

Aeterna Zentaris has a market capitalisation of US$148m and burnt through US$4.1m last year, which is 2.8% 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.

How Risky Is Aeterna Zentaris' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Aeterna Zentaris is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking a deeper dive, we've spotted 3 warning signs for Aeterna Zentaris you should be aware of, and 1 of them is potentially serious.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

When trading Aeterna Zentaris or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether Aeterna Zentaris is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis