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.
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 to avoid and some better opportunities instead.
Bally's (BALY)
Trailing 12-Month Free Cash Flow Margin: -11.1%
Headquartered in Providence, Rhode Island, Bally's Corporation (NYSE: BALY) is a diversified global casino-entertainment company that owns and manages casinos, resorts, and online gaming platforms.
Why Do We Avoid BALY?
- 2% annual revenue growth over the last two years was slower than its consumer discretionary peers
- 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
Bally’s stock price of $16.62 implies a valuation ratio of 11.8x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including BALY in your portfolio.
Sabre (SABR)
Trailing 12-Month Free Cash Flow Margin: -9.2%
Originally a division of American Airlines, Sabre (NASDAQ: SABR) is a technology provider for the global travel and tourism industry.
Why Should You Dump SABR?
- Number of central reservation system transactions has disappointed over the past two years, indicating weak demand for its offerings
- Cash burn makes us question whether it can achieve sustainable long-term growth
- High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Sabre is trading at $1.35 per share, or 10.9x forward P/E. To fully understand why you should be careful with SABR, check out our full research report (it’s free for active Edge members).
American Outdoor Brands (AOUT)
Trailing 12-Month Free Cash Flow Margin: -2.3%
Spun off from Smith and Wesson in 2020, American Outdoor Brands (NASDAQ: AOUT) is an outdoor and recreational products company that offers outdoor and shooting sports products but does not sell firearms themselves.
Why Do We Pass on AOUT?
- Sales were flat over the last five years, indicating it’s failed to expand its business
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.5% for the last two years
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $7.92 per share, American Outdoor Brands trades at 36x forward P/E. Dive into our free research report to see why there are better opportunities than AOUT.
Stocks We Like More
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