Rapid spending isn’t always a sign of progress. Some cash-burning businesses fail to convert investments into meaningful competitive advantages, leaving them vulnerable.
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. That said, here are three cash-burning companies that don’t make the cut and some better opportunities instead.
Kura Sushi (KRUS)
Trailing 12-Month Free Cash Flow Margin: -7.6%
Known for its conveyor belt that transports dishes to diners, Kura Sushi (NASDAQ: KRUS) is a chain of sushi restaurants serving traditional Japanese fare with a touch of modernity and technology.
Why Do We Think Twice About KRUS?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Cash burn makes us question whether it can achieve sustainable long-term growth
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Kura Sushi’s stock price of $54.63 implies a valuation ratio of 30.1x forward EV-to-EBITDA. If you’re considering KRUS for your portfolio, see our FREE research report to learn more.
Graham Corporation (GHM)
Trailing 12-Month Free Cash Flow Margin: -4.7%
Founded when its founder patented a unique design for a vacuum system used in the sugar refining process, Graham (NYSE: GHM) provides vacuum and heat transfer equipment for the energy, petrochemical, refining, and chemical sectors.
Why Are We Cautious About GHM?
- Subpar operating margin of 2.3% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Underwhelming 3.1% return on capital reflects management’s difficulties in finding profitable growth opportunities
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $61.16 per share, Graham Corporation trades at 40.1x forward P/E. To fully understand why you should be careful with GHM, check out our full research report (it’s free for active Edge members).
Evolent Health (EVH)
Trailing 12-Month Free Cash Flow Margin: -3.3%
Founded in 2011 to transform how healthcare is delivered to patients with complex needs, Evolent Health (NYSE: EVH) provides specialty care management services and technology solutions that help health plans and providers deliver better care for patients with complex conditions.
Why Does EVH Give Us Pause?
- 7.1% annual revenue growth over the last two years was slower than its healthcare peers
- Push for growth has led to negative returns on capital, signaling value destruction, and its falling returns suggest its earlier profit pools are drying up
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Evolent Health is trading at $3.94 per share, or 16.6x forward P/E. Dive into our free research report to see why there are better opportunities than EVH.
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