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?
- Historically negative EPS is a worrisome sign for conservative investors and obscures its long-term earnings potential
- 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
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?
- Historically negative EPS casts doubt for cautious investors and clouds its long-term earnings prospects
- 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
- 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?
- 3.4% annual revenue growth over the last two years was slower than its healthcare peers
- 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
- 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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