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. That said, here are three cash-burning companies to steer clear of and a few better alternatives.
Nextdoor (KIND)
Trailing 12-Month Free Cash Flow Margin: -2.7%
Helping residents figure out what's happening on their block in real time, Nextdoor (NYSE:KIND) is a social network that connects neighbors with each other and with local businesses.
Why Are We Wary of KIND?
- Choice to prioritize new users over monetization has resulted in weak growth in its average revenue per user
- Historical EBITDA margin losses point to an inefficient cost structure
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
Nextdoor’s stock price of $1.64 implies a valuation ratio of 3x forward price-to-gross profit. If you’re considering KIND for your portfolio, see our FREE research report to learn more.
Trex (TREX)
Trailing 12-Month Free Cash Flow Margin: -9.9%
Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company (NYSE:TREX) makes wood-alternative decking, railing, and patio furniture.
Why Are We Hesitant About TREX?
- Muted 5.4% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Free cash flow margin shrank by 3.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Waning returns on capital imply its previous profit engines are losing steam
At $57.62 per share, Trex trades at 25.8x forward P/E. Dive into our free research report to see why there are better opportunities than TREX.
Redwire (RDW)
Trailing 12-Month Free Cash Flow Margin: -25.9%
Based in Jacksonville, Florida, Redwire (NYSE:RDW) is a provider of systems and components used in space infrastructure.
Why Do We Think Twice About RDW?
- Revenue growth over the past four years was nullified by the company’s new share issuances as its earnings per share fell by 38.9% annually
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Redwire is trading at $20 per share, or 25x forward EV-to-EBITDA. To fully understand why you should be careful with RDW, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
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