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.

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

Rocket Lab (RKLB)

Trailing 12-Month Free Cash Flow Margin: -40.5%

Becoming the first private company in the Southern Hemisphere to reach space, Rocket Lab (NASDAQ: RKLB) offers rockets designed for launching small satellites.

Why Does RKLB Worry Us?

1. Historically negative EPS is a worrisome sign for conservative investors and obscures its long-term earnings potential
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

Rocket Lab is trading at $60.70 per share, or 42.4x forward price-to-sales. If you’re considering RKLB for your portfolio, see our FREE research report to learn more.

Redwire (RDW)

Trailing 12-Month Free Cash Flow Margin: -58.2%

Based in Jacksonville, Florida, Redwire (NYSE: RDW) is a provider of systems and components used in space infrastructure.

Why Do We Steer Clear of RDW?

1. Historically negative EPS casts doubt for cautious investors and clouds its long-term earnings prospects
2. Free cash flow margin shrank by 27.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

At $7.69 per share, Redwire trades at 14.3x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why RDW doesn’t pass our bar.

PacBio (PACB)

Trailing 12-Month Free Cash Flow Margin: -97.6%

Pioneering what scientists call "HiFi long-read sequencing," recognized as Nature Methods' method of the year for 2022, Pacific Biosciences (NASDAQ: PACB) develops advanced DNA sequencing systems that enable scientists and researchers to analyze genomes with unprecedented accuracy and completeness.

Why Is PACB Risky?

1. 3.4% annual revenue growth over the last two years was slower than its healthcare peers
2. Free cash flow margin dropped by 28.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

PacBio’s stock price of $1.80 implies a valuation ratio of 3.2x forward price-to-sales. Read our free research report to see why you should think twice about including PACB in your portfolio.

Stocks We Like More

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