Yahoo Finance Companies Like Aeterna Zentaris (TSE:AEZS) Can Afford To Invest In Growth
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Aeterna Zentaris (TSE:AEZS) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for Aeterna Zentaris
When Might Aeterna Zentaris Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2021, Aeterna Zentaris had US$68m in cash, and was debt-free. Importantly, its cash burn was US$4.2m over the trailing twelve months. So it had a very long cash runway of many years from September 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. 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. Arguably, however, the revenue growth of 218% during the period was even more impressive. Considering these factors, we're fairly impressed by its growth trajectory. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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?
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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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' cash burn of US$4.2m is about 7.2% of its US$58m 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.
Is Aeterna Zentaris' Cash Burn A Worry?
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. But it's fair to say that its cash burn relative to its market cap 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. Separately, we looked at different risks affecting the company and spotted 6 warning signs for Aeterna Zentaris (of which 2 are concerning!) you should know about.
Of course Aeterna Zentaris may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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.
