SOPHiA GENETICS (NASDAQ:SOPH) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, SOPHiA GENETICS SA (NASDAQ:SOPH) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

What Is SOPHiA GENETICS's Net 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. But on the other hand it also has US$105.4m in cash, leading to a US$92.1m net cash position.

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. Simply put, the fact that SOPHiA GENETICS has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, SOPHiA GENETICS reported revenue of US$65m, which is a gain of 20%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is SOPHiA GENETICS?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months SOPHiA GENETICS lost money at the earnings before interest and tax (EBIT) line. 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. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - SOPHiA GENETICS has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.