Here's Why We're Not Too Worried About SOPHiA GENETICS' (NASDAQ:SOPH) Cash Burn Situation

By
Simply Wall St
Published
November 24, 2021
NasdaqGS:SOPH
Source: Shutterstock

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, 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, the natural question for SOPHiA GENETICS (NASDAQ:SOPH) 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for SOPHiA GENETICS

When Might SOPHiA GENETICS Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2021, SOPHiA GENETICS had US$281m in cash, and was debt-free. Looking at the last year, the company burnt through US$58m. Therefore, from September 2021 it had 4.8 years of cash runway. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
NasdaqGS:SOPH Debt to Equity History November 24th 2021

How Well Is SOPHiA GENETICS Growing?

SOPHiA GENETICS boosted investment sharply in the last year, with cash burn ramping by 66%. But the silver lining is that operating revenue increased by 32% in that time. 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.

Can SOPHiA GENETICS Raise More Cash Easily?

There's no doubt SOPHiA GENETICS seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. 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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

SOPHiA GENETICS' cash burn of US$58m is about 6.3% of its US$915m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About SOPHiA GENETICS' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way SOPHiA GENETICS is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, SOPHiA GENETICS has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Of course SOPHiA GENETICS 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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