Here's Why We're Watching SOPHiA GENETICS' (NASDAQ:SOPH) Cash Burn Situation

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 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 SOPHiA GENETICS (NASDAQ:SOPH) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for SOPHiA GENETICS

How Long Is SOPHiA GENETICS' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When SOPHiA GENETICS last reported its balance sheet in September 2022, it had zero debt and cash worth US$189m. Importantly, its cash burn was US$84m over the trailing twelve months. That means it had a cash runway of about 2.3 years as of September 2022. Arguably, that's a prudent and sensible length of runway to have. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. Depicted below, you can see how its cash holdings have changed over time.

How Well Is SOPHiA GENETICS Growing?

Some investors might find it troubling that SOPHiA GENETICS is actually increasing its cash burn, which is up 45% in the last year. The silver lining is that revenue was up 21%, showing the business is growing at the top line. Considering both these factors, we're not particularly excited by its growth profile. 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 SOPHiA GENETICS Raise Cash?

SOPHiA GENETICS seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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$84m is about 58% of its US$144m market capitalisation. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

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

On this analysis of SOPHiA GENETICS' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. An in-depth examination of risks revealed 2 warning signs for SOPHiA GENETICS that readers should think about before committing capital to this stock.

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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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.