Stock Analysis

We're Hopeful That Aeterna Zentaris (TSE:AEZS) Will Use Its Cash Wisely

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Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Aeterna Zentaris (TSE:AEZS) shareholders 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.

Check out our latest analysis for Aeterna Zentaris

Does Aeterna Zentaris Have A Long 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 December 2021, Aeterna Zentaris had US$65m in cash, and was debt-free. Importantly, its cash burn was US$9.2m over the trailing twelve months. Therefore, from December 2021 it had 7.1 years of cash runway. 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.

TSX:AEZS Debt to Equity History May 10th 2022

How Well Is Aeterna Zentaris Growing?

Notably, Aeterna Zentaris actually ramped up its cash burn very hard and fast in the last year, by 123%, signifying heavy investment in the business. On the bright side, at least operating revenue was up 44% over the same period, giving some cause for hope. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Aeterna Zentaris Raise Cash?

We are certainly impressed with the progress Aeterna Zentaris has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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$34m and burnt through US$9.2m last year, which is 27% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is Aeterna Zentaris' Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Aeterna Zentaris' cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Aeterna Zentaris' situation. Taking an in-depth view of risks, we've identified 3 warning signs for Aeterna Zentaris that you should be aware of before investing.

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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