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.
Just because a company is spending heavily doesn’t mean it’s on the right track, and StockStory is here to separate the winners from the losers. Keeping that in mind, here are three cash-burning companies that don’t make the cut and some better opportunities instead.
First Watch (FWRG)
Trailing 12-Month Free Cash Flow Margin: -2.4%
Based on a nautical reference to the first work shift aboard a ship, First Watch (NASDAQ: FWRG) is a chain of breakfast and brunch restaurants whose menu is heavily-focused on eggs and griddle items such as pancakes.
Why Are We Hesitant About FWRG?
- Long-term business health is up for debate as its cash burn has increased over the last year
- ROIC of 2.2% reflects management’s challenges in identifying attractive investment opportunities
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $17.42 per share, First Watch trades at 44.5x forward P/E. To fully understand why you should be careful with FWRG, check out our full research report (it’s free).
Trex (TREX)
Trailing 12-Month Free Cash Flow Margin: -9.9%
Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company (NYSE: TREX) makes wood-alternative decking, railing, and patio furniture.
Why Does TREX Worry Us?
- Muted 5.4% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable
- Eroding returns on capital suggest its historical profit centers are aging
Trex is trading at $64.34 per share, or 29.9x forward P/E. Dive into our free research report to see why there are better opportunities than TREX.
Byrna (BYRN)
Trailing 12-Month Free Cash Flow Margin: -8.3%
Providing civilians with tools to disable, disarm, and deter would-be assailants, Byrna (NASDAQ: BYRN) is a provider of non-lethal weapons.
Why Are We Wary of BYRN?
- Suboptimal cost structure is highlighted by its history of operating margin losses
- 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
Byrna’s stock price of $22.37 implies a valuation ratio of 50.4x forward EV-to-EBITDA. If you’re considering BYRN for your portfolio, see our FREE research report to learn more.
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