Is Aeterna Zentaris (TSE:AEZS) In A Good Position To Invest In Growth?

Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Aeterna Zentaris (TSE:AEZS) 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Aeterna Zentaris

How Long Is Aeterna Zentaris's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Aeterna Zentaris last reported its balance sheet in March 2020, it had zero debt and cash worth US$9.2m. In the last year, its cash burn was US$10m. So it had a cash runway of approximately 11 months from March 2020. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

How Well Is Aeterna Zentaris Growing?

It was fairly positive to see that Aeterna Zentaris reduced its cash burn by 21% during the last year. But the revenue dip of 30% in the same period was a bit concerning. In light of the data above, we're fairly sanguine about the business growth trajectory. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Aeterna Zentaris is building its business over time.

Can Aeterna Zentaris Raise More Cash Easily?

Since Aeterna Zentaris revenue has been falling, the market will likely be considering how it can raise more cash if need be. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Aeterna Zentaris's cash burn of US$10m is about 25% of its US$41m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

How Risky Is Aeterna Zentaris's Cash Burn Situation?

On this analysis of Aeterna Zentaris's cash burn, we think its cash burn reduction was reassuring, while its falling revenue has us a bit worried. Summing up, we think the Aeterna Zentaris's cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 5 warning signs for Aeterna Zentaris you should be aware of, and 2 of them are 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)

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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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