There's no doubt that money can be made by owning shares of unprofitable businesses. 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 should Aeterna Zentaris (TSE:AEZS) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Aeterna Zentaris Run Out Of Money?
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. As at September 2021, Aeterna Zentaris had cash of US$68m and no debt. Importantly, its cash burn was US$4.2m over the trailing twelve months. That means it had a cash runway of very many years as of September 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. You can see how its cash balance has changed over time in the image below.
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 57% over the last year. And it is also great to see that the revenue is up a stonking 218% in the same time period. Overall, we'd say its growth is rather impressive. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Aeterna Zentaris Raise Cash?
While Aeterna Zentaris seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. 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 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$68m and burnt through US$4.2m last year, which is 6.1% of the company's market value. 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. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. 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, Aeterna Zentaris has 6 warning signs (and 2 which are a bit concerning) we think you should know about.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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