While some companies burn cash to fuel expansion, others struggle to turn spending into sustainable growth. A high cash burn rate without a strong balance sheet can leave investors exposed to significant downside.
Negative cash flow can lead to trouble, but StockStory helps you identify the businesses that stand a chance of making it through. That said, here are three cash-burning companies that don’t make the cut and some better opportunities instead.
Avis Budget Group (CAR)
Trailing 12-Month Free Cash Flow Margin: -11.9%
The parent company of brands such as Zipcar and Budget Truck Rental, Avis (NASDAQ:CAR) is a provider of car rental and mobility solutions.
Why Should You Sell CAR?
- Sluggish trends in its available rental days - car rental suggest customers aren’t adopting its solutions as quickly as the company hoped
- Eroding returns on capital suggest its historical profit centers are aging
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $150.42 per share, Avis Budget Group trades at 10.8x forward P/E. Read our free research report to see why you should think twice about including CAR in your portfolio.
Rocket Lab (RKLB)
Trailing 12-Month Free Cash Flow Margin: -40.5%
Becoming the first private company in the Southern Hemisphere to reach space, Rocket Lab (NASDAQ:RKLB) offers rockets designed for launching small satellites.
Why Is RKLB Not Exciting?
- Historically negative EPS is a worrisome sign for conservative investors and obscures its long-term earnings potential
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Rocket Lab’s stock price of $41.40 implies a valuation ratio of 30.1x forward price-to-sales. If you’re considering RKLB for your portfolio, see our FREE research report to learn more.
First Advantage (FA)
Trailing 12-Month Free Cash Flow Margin: -2.2%
Processing approximately 100 million background checks annually across more than 200 countries and territories, First Advantage (NASDAQ:FA) provides employment background screening, identity verification, and compliance solutions to help companies manage hiring risks.
Why Are We Cautious About FA?
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
- Free cash flow margin dropped by 16.5 percentage points over the last five years, implying the company increased its investment activities to fend off competitors
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
First Advantage is trading at $16.32 per share, or 15.8x forward P/E. Check out our free in-depth research report to learn more about why FA doesn’t pass our bar.
Stocks We Like More
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