Rapid spending isn’t always a sign of progress. Some cash-burning businesses fail to convert investments into meaningful competitive advantages, leaving them vulnerable.
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.
Sportsman's Warehouse (SPWH)
Trailing 12-Month Free Cash Flow Margin: -4.5%
A go-to destination for individuals passionate about hunting, fishing, camping, hiking, shooting sports, and more, Sportsman's Warehouse (NASDAQ: SPWH) is an American specialty retailer offering a diverse range of active gear, equipment, and apparel.
Why Do We Think SPWH Will Underperform?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Free cash flow margin dropped by 9.2 percentage points over the last year, implying the company became more capital intensive as competition picked up
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Sportsman's Warehouse’s stock price of $2.97 implies a valuation ratio of 2.9x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SPWH in your portfolio.
Krispy Kreme (DNUT)
Trailing 12-Month Free Cash Flow Margin: -8.9%
Famous for its Original Glazed doughnuts and parent company of Insomnia Cookies, Krispy Kreme (NASDAQ: DNUT) is one of the most beloved and well-known fast-food chains in the world.
Why Is DNUT Risky?
- Earnings per share have dipped by 38.7% annually over the past three years, which is concerning because stock prices follow EPS over the long term
- Increased cash burn over the last year raises questions about the return timeline for its investments
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
At $3.64 per share, Krispy Kreme trades at 4.1x forward EV-to-EBITDA. To fully understand why you should be careful with DNUT, check out our full research report (it’s free).
AAON (AAON)
Trailing 12-Month Free Cash Flow Margin: -14.2%
Backed by two million square feet of lab testing space, AAON (NASDAQ: AAON) makes heating, ventilation, and air conditioning equipment for different types of buildings.
Why Are We Wary of AAON?
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 5.2 percentage points
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 8.3% annually while its revenue grew
- Free cash flow margin dropped by 26.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up
AAON is trading at $91.49 per share, or 38.1x forward P/E. Dive into our free research report to see why there are better opportunities than AAON.
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