Stock Analysis

Here's Why We're Not At All Concerned With Aeterna Zentaris' (TSE:AEZS) Cash Burn Situation

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TSX:AEZS
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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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Aeterna Zentaris (TSE:AEZS) shareholders is whether they should be concerned by its rate of cash burn. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Aeterna Zentaris

How Long Is Aeterna Zentaris' Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In March 2021, Aeterna Zentaris had US$73m in cash, and was debt-free. Looking at the last year, the company burnt through US$3.2m. So it had a very long cash runway of many years from March 2021. 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. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
TSX:AEZS Debt to Equity History July 15th 2021

How Well Is Aeterna Zentaris Growing?

Happily, Aeterna Zentaris is travelling in the right direction when it comes to its cash burn, which is down 68% over the last year. This reduction was no doubt supported by its strong revenue growth of 99% in the same period. Overall, we'd say its growth is rather impressive. 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 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. 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.

Aeterna Zentaris' cash burn of US$3.2m is about 3.5% of its US$92m market capitalisation. 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 Aeterna Zentaris' Cash Burn?

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 revenue growth suggests that the company is on a good path. And even its cash burn reduction was very encouraging. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Aeterna Zentaris (1 can't be ignored!) that you should be aware of before investing here.

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)

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