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 to avoid and some better opportunities instead.
Lovesac (LOVE)
Trailing 12-Month Free Cash Flow Margin: -2%
Known for its oversized, premium beanbags, Lovesac (NASDAQ: LOVE) is a specialty furniture brand selling modular furniture.
Why Do We Pass on LOVE?
- Annual revenue growth of 19.5% over the last five years was below our standards for the consumer discretionary sector
- Low free cash flow margin of 1.1% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Lovesac is trading at $12.87 per share, or 10.6x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why LOVE doesn’t pass our bar.
JELD-WEN (JELD)
Trailing 12-Month Free Cash Flow Margin: -5.1%
Founded in the 1960s as a general wood-making company, JELD-WEN (NYSE: JELD) manufactures doors, windows, and other related building products.
Why Is JELD Risky?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $2.78 per share, JELD-WEN trades at 11.1x forward EV-to-EBITDA. If you’re considering JELD for your portfolio, see our FREE research report to learn more.
PacBio (PACB)
Trailing 12-Month Free Cash Flow Margin: -81.7%
Pioneering what scientists call "HiFi long-read sequencing," recognized as Nature Methods' method of the year for 2022, Pacific Biosciences (NASDAQ: PACB) develops advanced DNA sequencing systems that enable scientists and researchers to analyze genomes with unprecedented accuracy and completeness.
Why Do We Think PACB Will Underperform?
- Annual sales declines of 4.5% for the past two years show its products and services struggled to connect with the market during this cycle
- Increased cash burn over the last five years raises questions about the return timeline for its investments
- EBITDA losses may force it to accept punitive lending terms or high-cost debt
PacBio’s stock price of $1.71 implies a valuation ratio of 3.4x forward price-to-sales. Read our free research report to see why you should think twice about including PACB in your portfolio.
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