We're Hopeful That SOPHiA GENETICS (NASDAQ:SOPH) Will Use Its Cash Wisely

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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether SOPHiA GENETICS (NASDAQ:SOPH) 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. 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 the amount of time it would take to burn through its cash reserves at its current cash burn rate. When SOPHiA GENETICS last reported its balance sheet in March 2022, it had zero debt and cash worth US$244m. In the last year, its cash burn was US$73m. That means it had a cash runway of about 3.3 years as of March 2022. 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.

How Well Is SOPHiA GENETICS Growing?

SOPHiA GENETICS boosted investment sharply in the last year, with cash burn ramping by 88%. On the bright side, at least operating revenue was up 42% over the same period, giving some cause for hope. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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?

We are certainly impressed with the progress SOPHiA GENETICS has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. 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. 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$231m, SOPHiA GENETICS' US$73m in cash burn equates to about 32% 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.

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

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought SOPHiA GENETICS' cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about SOPHiA GENETICS' situation. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for SOPHiA GENETICS that potential shareholders should take into account before putting money into a 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.