Yahoo Finance Companies Like Aeterna Zentaris (TSE:AEZS) Can Be Considered Quite Risky
There's no doubt that money can be made by owning shares of unprofitable businesses. 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 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 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 company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2019, Aeterna Zentaris had cash of US$11m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was US$10m over the trailing twelve months. That means it had a cash runway of around 12 months as of September 2019. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.
Is Aeterna Zentaris's Revenue Growing?
Given that Aeterna Zentaris actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Sadly, operating revenue actually dropped like a stone in the last twelve months, falling 93%, which is rather concerning. Of course, we've only taken a quick look at the stock's growth metrics, here. 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 its revenue growth is moving in the wrong direction, Aeterna Zentaris shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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 63% of its US$17m market capitalisation. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.
Is Aeterna Zentaris's Cash Burn A Worry?
On this analysis of Aeterna Zentaris's cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Aeterna Zentaris CEO receives in total remuneration.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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