Running at a loss can be a red flag. Many of these businesses face mounting challenges as competition increases and funding becomes harder to secure.
Unprofitable companies face an uphill battle, but not all are created equal. Luckily for you, StockStory is here to separate the promising ones from the weak. Keeping that in mind, here are three unprofitable companiesto avoid and some better opportunities instead.
Sleep Number (SNBR)
Trailing 12-Month GAAP Operating Margin: -2.5%
Known for mattresses that can be adjusted with regards to firmness, Sleep Number (NASDAQ: SNBR) manufactures and sells its own brand of bedding products such as mattresses, bed frames, and pillows.
Why Do We Avoid SNBR?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 51.4% annually, worse than its revenue
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
At $8.46 per share, Sleep Number trades at 15x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why SNBR doesn’t pass our bar.
Mercury Systems (MRCY)
Trailing 12-Month GAAP Operating Margin: -1.6%
Founded in 1981, Mercury Systems (NASDAQ: MRCY) specializes in providing processing subsystems and components for primarily defense applications.
Why Should You Dump MRCY?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 7.6 percentage points
- Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 18.3% annually
Mercury Systems’s stock price of $69.64 implies a valuation ratio of 72.3x forward P/E. If you’re considering MRCY for your portfolio, see our FREE research report to learn more.
Methode Electronics (MEI)
Trailing 12-Month GAAP Operating Margin: -1.8%
Founded in 1946, Methode Electronics (NYSE: MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).
Why Should You Sell MEI?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Methode Electronics is trading at $6.66 per share, or 89.6x forward P/E. Read our free research report to see why you should think twice about including MEI in your portfolio.
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