Is SOPHiA GENETICS (NASDAQ:SOPH) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies SOPHiA GENETICS SA (NASDAQ:SOPH) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for SOPHiA GENETICS

What Is SOPHiA GENETICS's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 SOPHiA GENETICS had US$13.3m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$105.4m in cash, so it actually has US$92.1m net cash.

How Healthy Is SOPHiA GENETICS' Balance Sheet?

The latest balance sheet data shows that SOPHiA GENETICS had liabilities of US$28.6m due within a year, and liabilities of US$31.0m falling due after that. Offsetting these obligations, it had cash of US$105.4m as well as receivables valued at US$9.92m due within 12 months. So it actually has US$55.7m more liquid assets than total liabilities.

This excess liquidity suggests that SOPHiA GENETICS is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, SOPHiA GENETICS boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine SOPHiA GENETICS's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year SOPHiA GENETICS wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to US$65m. With any luck the company will be able to grow its way to profitability.

So How Risky Is SOPHiA GENETICS?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that SOPHiA GENETICS had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$56m of cash and made a loss of US$67m. However, it has net cash of US$92.1m, so it has a bit of time before it will need more capital. SOPHiA GENETICS's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for SOPHiA GENETICS that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.