There is no doubt that it is possible to make money by owning shares of unprofitable companies. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. But while history boasts of these rare successes, those who fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we would examine whether GENETIC SOPHIA (NASDAQ: SOPH) shareholders should be concerned about its consumption of cash. For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. First, we will determine its cash trail by comparing its cash consumption with its cash reserves.
How long does the SOPHiA GENETICS cash trail last?
A company’s cash trail is calculated by dividing its cash hoard by its cash burn. When SOPHiA GENETICS last published its balance sheet in September 2022, it had no debt and cash worth $189 million. Importantly, its cash burn was US$84 million over the last twelve months. That means it had a cash trail of around 2.3 years in September 2022. Arguably, that’s a conservative and reasonable runway length to have. It is important to note that if we extrapolate recent cash consumption trends, the cash trail would be significantly longer. Below you can see how its liquidity has changed over time.
How is SOPHiA GENETICS growing?
Some investors might find it troubling that SOPHiA GENETICS is actually increasing its cash consumption, which has increased by 45% over the past year. The silver lining is that revenue has increased by 21%, showing that the company is growing on a revenue level. Given these two factors, we’re not particularly excited about its growth profile. While the past is always worth studying, it is the future that matters most. For this reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How easily can SOPHiA GENETICS raise funds?
SOPHiA GENETICS seems to be in a pretty good position in terms of cash burn, but we still think it’s worth considering how easily it could raise more cash if it wanted to. In general, a listed company can raise new funds by issuing shares or by going into debt. Typically, a company will sell new stock on its own to raise cash and drive growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
SOPHiA GENETICS’ cash burn of US$84 million represents approximately 58% of its market capitalization of US$144 million. These are high expenses relative to the value of the entire company, so if it has to issue stock to fund further growth, it could end up hurting shareholder returns significantly (through significant dilution).
So, should we be worried about SOPHiA GENETICS’ cash consumption?
On this analysis of SOPHiA GENETICS’ cash burn, we think its cash trail was reassuring, while its cash burn relative to its market capitalization worries us a bit. While we don’t think it has a problem with its cash burn, the analysis we’ve done in this article suggests that shareholders should think carefully about the potential cost of raising more money in the future. A thorough review of the risks revealed 2 warning signs for SOPHiA GENETICS readers should consider before committing capital to this title.
Valuation is complex, but we help make it simple.
Find out if GENETIC SOPHIA is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.