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. Keeping that in mind, here are three cash-burning companies that don’t make the cut and some better opportunities instead.
Kratos (KTOS)
Trailing 12-Month Free Cash Flow Margin: -7.3%
Established with a commitment to supporting national security, Kratos (NASDAQ: KTOS) is a provider of advanced engineering, technology, and security solutions tailored for critical national security applications.
Why Are We Hesitant About KTOS?
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 9 percentage points
- Underwhelming 3.2% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Kratos is trading at $82.04 per share, or 106.7x forward P/E. If you’re considering KTOS for your portfolio, see our FREE research report to learn more.
Redwire (RDW)
Trailing 12-Month Free Cash Flow Margin: -53.9%
Based in Jacksonville, Florida, Redwire (NYSE: RDW) is a provider of systems and components used in space infrastructure.
Why Do We Avoid RDW?
- Historically negative EPS is a worrisome sign for conservative investors and obscures its long-term earnings potential
- Free cash flow margin dropped by 14.8 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
Redwire’s stock price of $8.28 implies a valuation ratio of 69x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why RDW doesn’t pass our bar.
Hertz (HTZ)
Trailing 12-Month Free Cash Flow Margin: -3.9%
Started with a dozen Model T Fords, Hertz (NASDAQ: HTZ) is a global car rental company providing vehicle rental services to leisure and business travelers.
Why Do We Pass on HTZ?
- Flat unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Eroding returns on capital suggest its historical profit centers are aging
- High net-debt-to-EBITDA ratio of 9× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $5.74 per share, Hertz trades at 106.1x forward EV-to-EBITDA. To fully understand why you should be careful with HTZ, check out our full research report (it’s free for active Edge members).
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