There is no doubt that money can be made by owning shares in unprofitable companies. For example, although Amazon.com suffered losses for many years after going public, if you had bought and held the stock since 1999, you would have made a fortune. But while the successes are well known, investors shouldn’t ignore the myriad unprofitable companies that simply burn through all their cash and go bankrupt.
Hence, the natural question for GENETIC SOPHIA (NASDAQ:SOPH) is whether they should be concerned about its cash burn rate. In this report, we’ll look at the company’s annual negative free cash flow, which we’ll refer to as “cash burn” from now on. First, we’ll determine your cash trail by comparing your cash consumption to your cash reserves.
See our latest analysis for SOPHiA GENETICS
How long is the SOPHiA GENETICS cash trail?
You can calculate a company’s cash run by dividing how much cash it has by the rate at which it’s spending that cash. When SOPHiA GENETICS last reported its balance sheet in March 2023, it had zero debt and $162 million in cash. Over the past year, his cash burn was $77 million. That means it had a cash trail of about 2.1 years as of March 2023. That’s decent, giving the company a couple of years to grow its business. Importantly, if we extrapolate recent cash burn trends, the liquidity trail would be significantly longer. Depicted below, you can see how its cash holdings have changed over time.
How well is SOPHiA GENETICS growing?
At first glance it is a little concerning to see that SOPHiA GENETICS has actually increased its cash burn by 6.0%, year over year. At least revenue was up 20% during the period, though it hasn’t increased by much. On balance, we’d say the company is getting better over time. While the past is always worth studying, it is the future that matters most of all. Then you could take a look at how much the company is expected to grow over the next few years.
Can SOPHiA GENETICS easily raise more money?
While SOPHiA GENETICS appears to be in a pretty good position, it’s still worth considering how easily it could raise more money, if only to fuel faster growth. In general, a listed company can raise new cash by issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it would need to issue to run the company for another year (at the same burn rate).
SOPHiA GENETICS has a market capitalization of US$285 million and burned US$77 million last year, which is 27% of the company’s market value. That’s a significant cash saving, so if the company had to sell shares to cover another year’s cost of operations, shareholders would face costly dilution.
How risky is the SOPHiA GENETICS cash burn situation?
In this analysis of SOPHiA GENETICS’ cash burn, we find its cash run reassuring, while the cash burn relative to its market capitalization concerns us a bit. Cash-burning companies are always on the riskier side of things, but after considering all the factors discussed in this short piece, we’re not too concerned about its money-burning rate. Separately, we have looked at the different risks affecting the company and identified them 2 warning signs for SOPHiA GENETICS (of which 1 makes us a little uncomfortable!) that you should know.
Obviously, you may find a fantastic investment by looking elsewhere. Then check this out free list of companies insiders are buying and this list of stock growth stocks (according to analyst forecasts)
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using unbiased methodology only and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis driven by fundamental data. Please 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 of the stocks mentioned.
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