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. Keeping that in mind, here are three cash-burning companies to avoid and some better opportunities instead.
RH (RH)
Trailing 12-Month Free Cash Flow Margin: -1.5%
Formerly known as Restoration Hardware, RH (NYSE: RH) is a specialty retailer that exclusively sells its own brand of high-end furniture and home decor.
Why Is RH Not Exciting?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Cash-burning history makes us doubt the long-term viability of its business model
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
RH is trading at $222.82 per share, or 17x forward P/E. Check out our free in-depth research report to learn more about why RH doesn’t pass our bar.
Advance Auto Parts (AAP)
Trailing 12-Month Free Cash Flow Margin: -3.3%
Founded in Virginia in 1932, Advance Auto Parts (NYSE: AAP) is an auto parts and accessories retailer that sells everything from carburetors to motor oil to car floor mats.
Why Do We Avoid AAP?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Free cash flow margin shrank by 6.8 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $64 per share, Advance Auto Parts trades at 24.6x forward P/E. Dive into our free research report to see why there are better opportunities than AAP.
Moog (MOG.A)
Trailing 12-Month Free Cash Flow Margin: -3.9%
Responsible for the flight control actuation system integrated in the B-2 stealth bomber, Moog (NYSE: MOG.A) provides precision motion control solutions used in aerospace and defense applications
Why Are We Wary of MOG.A?
- Muted 4.2% annual revenue growth over the last five years shows its demand lagged behind its industrials peers
- Estimated sales growth of 2.8% for the next 12 months implies demand will slow from its two-year trend
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 12.8 percentage points
Moog’s stock price of $197.08 implies a valuation ratio of 22.4x forward P/E. If you’re considering MOG.A for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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