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 steer clear of and a few better alternatives.
Air Lease (AL)
Trailing 12-Month Free Cash Flow Margin: -80.1%
Established by a founder of Century City in Los Angeles, Air Lease Corporation (NYSE: AL) provides aircraft leasing and financing solutions to airlines worldwide.
Why Do We Steer Clear of AL?
- Muted 6.4% annual revenue growth over the last five years shows its demand lagged behind its industrials peers
- Free cash flow margin dropped by 50.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Air Lease is trading at $53.62 per share, or 3x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why AL doesn’t pass our bar.
Patterson Companies (PDCO)
Trailing 12-Month Free Cash Flow Margin: -13.3%
With roots dating back to 1877 and serving over 150,000 customers across North America and the UK, Patterson Companies (NASDAQ: PDCO) is a specialty distributor that supplies dental practices and animal health professionals with equipment, consumables, pharmaceuticals, and practice management software.
Why Does PDCO Give Us Pause?
- 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
- Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
Patterson Companies’s stock price of $31.34 implies a valuation ratio of 13.6x forward P/E. Read our free research report to see why you should think twice about including PDCO in your portfolio.
Applied Digital (APLD)
Trailing 12-Month Free Cash Flow Margin: -314%
Pivoting from its origins in cryptocurrency mining to become a key player in the AI infrastructure boom, Applied Digital (NASDAQ: APLD) designs and operates specialized data centers that provide high-performance computing infrastructure for artificial intelligence and blockchain applications.
Why Do We Think Twice About APLD?
- Historically negative EPS raises concerns for risk-averse investors and makes its earnings potential harder to gauge
- Cash-burning history makes us doubt the long-term viability of its business model
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
At $5.48 per share, Applied Digital trades at 9.6x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why APLD doesn’t pass our bar.
Stocks We Like More
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