3 Cash-Burning Stocks We Steer Clear Of
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. That said, here are three cash-burning companies that don’t make the cut and some better opportunities instead.
Portillo's (PTLO)
Trailing 12-Month Free Cash Flow Margin: -1.2%
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 Do We Pass on PTLO?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.8% for the last two years
- 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Portillo’s stock price of $3.89 implies a valuation ratio of 19.2x forward P/E. Read our free research report to see why you should think twice about including PTLO in your portfolio.
First Watch (FWRG)
Trailing 12-Month Free Cash Flow Margin: -1.6%
Based on a nautical reference to the first work shift aboard a ship, First Watch (NASDAQ:FWRG) is a chain of breakfast and brunch restaurants whose menu is heavily-focused on eggs and griddle items such as pancakes.
Why Does FWRG Give Us Pause?
- Cash-burning history makes us doubt the long-term viability of its business model
- Underwhelming 4.6% return on capital reflects management’s difficulties in finding profitable growth opportunities
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
First Watch is trading at $10.57 per share, or 52.1x forward P/E. If you’re considering FWRG for your portfolio, see our FREE research report to learn more.
Atlas Energy Solutions (AESI)
Trailing 12-Month Free Cash Flow Margin: -17.2%
Building the world's first long-haul proppant conveyor system to reduce truck traffic, Atlas Energy Solutions (NYSE:AESI) mines and processes sand used as proppant to prop open fractures in oil and gas wells during hydraulic fracturing.
Why Are We Out on AESI?
- Efficiency has decreased over the last five years as its EBITDA margin fell by 38.5 percentage points
- Negative free cash flow raises questions about the return timeline for its investments
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $13.64 per share, Atlas Energy Solutions trades at 10.7x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than AESI.
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