Companies that burn cash at a rapid pace can run into serious trouble if they fail to secure funding. Without a clear path to profitability, these businesses risk dilution, mounting debt, or even bankruptcy.

Not all companies are worth the risk, and that’s why we built StockStory - to help you spot the red flags. That said, here are three cash-burning companies to steer clear of and a few better alternatives.

Krispy Kreme (DNUT)

Trailing 12-Month Free Cash Flow Margin: -6.4%

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?

1. Earnings per share have dipped by 28.6% annually over the past four years, which is concerning because stock prices follow EPS over the long term
2. Cash-burning history makes us doubt the long-term viability of its business model
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

Krispy Kreme’s stock price of $3.15 implies a valuation ratio of 14.5x forward EV-to-EBITDA. If you’re considering DNUT for your portfolio, see our FREE research report to learn more.

American Airlines (AAL)

Trailing 12-Month Free Cash Flow Margin: -1.2%

One of the ‘Big Four’ airlines in the US, American Airlines (NASDAQ: AAL) is a major global air carrier that serves both business and leisure travelers through its domestic and international flights.

Why Do We Pass on AAL?

1. Number of revenue passenger miles has disappointed over the past two years, indicating weak demand for its offerings
2. Returns on capital are growing as management invests in more worthwhile ventures
3. 9× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

At $13.28 per share, American Airlines trades at 6.3x forward P/E. Read our free research report to see why you should think twice about including AAL in your portfolio.

Acadia Healthcare (ACHC)

Trailing 12-Month Free Cash Flow Margin: -10.6%

With a network of over 250 facilities serving patients in 38 states and Puerto Rico, Acadia Healthcare (NASDAQ: ACHC) operates facilities providing mental health and substance use disorder treatment services across the United States.

Why Does ACHC Fall Short?

1. Underwhelming admissions over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 5.2 percentage points
3. 21.7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

Acadia Healthcare is trading at $13.45 per share, or 8.5x forward P/E. To fully understand why you should be careful with ACHC, check out our full research report (it’s free).

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