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.
Portillo's (PTLO)
Trailing 12-Month Free Cash Flow Margin: -2%
Begun as a Chicago hot dog stand in 1963, Portillo’s (NASDAQ: PTLO) is a casual restaurant chain that serves Chicago-style hot dogs and beef sandwiches as well as fries and shakes.
Why Should You Sell PTLO?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Weak free cash flow margin of -0.9% has deteriorated further over the last year as its investments increased
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $5.86 per share, Portillo's trades at 29.2x forward P/E. Dive into our free research report to see why there are better opportunities than PTLO.
Custom Truck One Source (CTOS)
Trailing 12-Month Free Cash Flow Margin: -6.4%
Inspired by a family gas station, Custom Truck One Source (NYSE: CTOS) is a distributor of trucks and heavy equipment.
Why Are We Hesitant About CTOS?
- Annual revenue growth of 2.9% over the last two years was below our standards for the industrials sector
- Earnings per share have contracted by 47.9% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Free cash flow margin dropped by 19.4 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Custom Truck One Source is trading at $6.60 per share, or 7.9x forward EV-to-EBITDA. If you’re considering CTOS for your portfolio, see our FREE research report to learn more.
STAAR Surgical (STAA)
Trailing 12-Month Free Cash Flow Margin: -17.1%
With over 2.5 million implants performed worldwide, STAAR Surgical (NASDAQ: STAA) designs and manufactures implantable lenses that correct vision problems without removing the eye's natural lens.
Why Do We Think STAA Will Underperform?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 37.3 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
STAAR Surgical’s stock price of $17.57 implies a valuation ratio of 35.7x forward P/E. To fully understand why you should be careful with STAA, check out our full research report (it’s free).
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