Companies that burn cash at a rapid pace can run into serious trouble if they fail to secure funding. Without a clear path to profitability, these businesses risk dilution, mounting debt, or even bankruptcy.
Just because a company is spending heavily doesn’t mean it’s on the right track, and StockStory is here to separate the winners from the losers. Keeping that in mind, here are three cash-burning companies to avoid and some better opportunities instead.
Redwire (RDW)
Trailing 12-Month Free Cash Flow Margin: -41.9%
Based in Jacksonville, Florida, Redwire (NYSE: RDW) is a provider of systems and components used in space infrastructure.
Why Should You Dump RDW?
- Historically negative EPS raises concerns for risk-averse investors and makes its earnings potential harder to gauge
- 14 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $10.94 per share, Redwire trades at 4.2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than RDW.
Perma-Fix (PESI)
Trailing 12-Month Free Cash Flow Margin: -29.7%
Tackling hazardous waste challenges since 1990, Perma-Fix (NASDAQ: PESI) provides environmental waste treatment services.
Why Do We Avoid PESI?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 10.7% annually over the last five years
- Free cash flow margin shrank by 26.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Perma-Fix’s stock price of $12.29 implies a valuation ratio of 2.8x forward price-to-sales. To fully understand why you should be careful with PESI, check out our full research report (it’s free).
Dave & Buster's (PLAY)
Trailing 12-Month Free Cash Flow Margin: -1.6%
Founded by a former game parlor and bar operator, Dave & Buster’s (NASDAQ: PLAY) operates a chain of arcades providing immersive entertainment experiences.
Why Do We Steer Clear of PLAY?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Dave & Buster's is trading at $11.65 per share, or 7.8x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why PLAY doesn’t pass our bar.
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