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.
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 to avoid and some better opportunities instead.
Methode Electronics (MEI)
Trailing 12-Month Free Cash Flow Margin: -1.3%
Founded in 1946, Methode Electronics (NYSE:MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).
Why Is MEI Risky?
- Sales tumbled by 2.5% annually over the last five years, showing market trends are working against it during this cycle
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7.3 percentage points
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Methode Electronics is trading at $15.75 per share, or 8.8x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than MEI.
Purple (PRPL)
Trailing 12-Month Free Cash Flow Margin: -2.1%
Founded by two brothers, Purple (NASDAQ:PRPL) creates sleep and home comfort products such as mattresses, pillows, and bedding accessories.
Why Do We Steer Clear of PRPL?
- Products and services aren’t resonating with the market as its revenue declined by 9.1% annually over the last five years
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $2.11 per share, Purple trades at 12.2x forward EV-to-EBITDA. If you’re considering PRPL for your portfolio, see our FREE research report to learn more.
Guardant Health (GH)
Trailing 12-Month Free Cash Flow Margin: -20.3%
Pioneering the field of "liquid biopsy" with technology that can identify cancer-specific genetic mutations from a simple blood draw, Guardant Health (NASDAQ:GH) develops blood tests that detect and monitor cancer by analyzing tumor DNA in the bloodstream, helping doctors make treatment decisions without invasive biopsies.
Why Are We Cautious About GH?
- Smaller revenue base of $1.18 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy (but also enables it to grow faster if it executes properly)
- Cash-burning history makes us doubt the long-term viability of its business model
- EBITDA losses may force it to accept punitive lending terms or high-cost debt
Guardant Health’s stock price of $177.50 implies a valuation ratio of 14.9x forward price-to-sales. Read our free research report to see why you should think twice about including GH in your portfolio.
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