Stock Analysis

We Think Homology Medicines (NASDAQ:FIXX) Can Afford To Drive Business Growth

  •  Updated
NasdaqGS:FIXX
Source: Shutterstock

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Homology Medicines (NASDAQ:FIXX) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Homology Medicines

When Might Homology Medicines Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Homology Medicines last reported its balance sheet in June 2021, it had zero debt and cash worth US$213m. Importantly, its cash burn was US$97m over the trailing twelve months. That means it had a cash runway of about 2.2 years as of June 2021. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
NasdaqGS:FIXX Debt to Equity History September 18th 2021

How Well Is Homology Medicines Growing?

Homology Medicines reduced its cash burn by 15% during the last year, which points to some degree of discipline. But that's nothing compared to its mouth-watering operating revenue growth of 1,430%. We think it is growing rather well, upon reflection. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Homology Medicines To Raise More Cash For Growth?

We are certainly impressed with the progress Homology Medicines 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. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of US$484m, Homology Medicines' US$97m in cash burn equates to about 20% 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 Homology Medicines' Cash Burn?

On this analysis of Homology Medicines' cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking a deeper dive, we've spotted 4 warning signs for Homology Medicines you should be aware of, and 1 of them doesn't sit too well with us.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

When trading Homology Medicines or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether Homology Medicines is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis