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.
Negative cash flow can lead to trouble, but StockStory helps you identify the businesses that stand a chance of making it through. Keeping that in mind, here are three cash-burning companies to avoid and some better opportunities instead.
Lincoln Educational (LINC)
Trailing 12-Month Free Cash Flow Margin: -1.7%
Established in 1946, Lincoln Educational (NASDAQ: LINC) is a provider of specialized technical training in the United States, offering career-oriented programs to provide practical skills required in the workforce.
Why Do We Pass on LINC?
- Performance surrounding its enrolled students has lagged its peers
- Cash-burning history makes us doubt the long-term viability of its business model
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $48.64 per share, Lincoln Educational trades at 2.5x forward price-to-sales. Check out our free in-depth research report to learn more about why LINC doesn’t pass our bar.
Resideo (REZI)
Trailing 12-Month Free Cash Flow Margin: -17.6%
Resideo Technologies, Inc. (NYSE: REZI) is a manufacturer and distributor of technology-driven products and solutions for home comfort, energy management, water management, and safety and security.
Why Are We Wary of REZI?
- Sales trends were unexciting over the last five years as its 7.5% annual growth was below the typical industrials company
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 20.7 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
Resideo’s stock price of $28.76 implies a valuation ratio of 0.6x forward price-to-sales. To fully understand why you should be careful with REZI, check out our full research report (it’s free).
Granite Ridge Resources (GRNT)
Trailing 12-Month Free Cash Flow Margin: -3.5%
Operating without drilling rigs or field crews of its own, Granite Ridge Resources (NYSE: GRNT) owns interests in oil and natural gas wells across six major US shale basins.
Why Are We Hesitant About GRNT?
- 8.7% annual revenue growth over the last four years was slower than its energy upstream and integrated energy peers
- Modest revenue base of $455.6 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Expenses have increased as a percentage of revenue over the last five years as its EBITDA margin fell by 33.9 percentage points
Granite Ridge Resources is trading at $5.52 per share, or 8.7x forward P/E. If you’re considering GRNT for your portfolio, see our FREE research report to learn more.
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