Is Aeterna Zentaris (TSE:AEZS) In A Good Position To Deliver On Growth Plans?

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, 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

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 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.

View 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. As at March 2020, Aeterna Zentaris had cash of US$9.2m and no debt. Importantly, its cash burn was US$10m over the trailing twelve months. 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. Depicted below, you can see how its cash holdings have changed over time.

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. 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 has developed its business over time by checking this visualization of its revenue and earnings history.

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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Since it has a market capitalisation of US$41m, Aeterna Zentaris's US$10m in cash burn equates to about 25% of its 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'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 concerning.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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