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 steer clear of and a few better alternatives.
Vishay Intertechnology (VSH)
Trailing 12-Month Free Cash Flow Margin: -2.8%
Named after the founder's ancestral village in present-day Lithuania, Vishay Intertechnology (NYSE: VSH) manufactures simple chips and electronic components that are building blocks of virtually all types of electronic devices.
Why Are We Out on VSH?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.3% annually over the last two years
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 51.9% annually
- Cash-burning history and the downward spiral in its margin profile make us wonder if it has a viable business model
At $42.56 per share, Vishay Intertechnology trades at 1.5x forward price-to-sales. To fully understand why you should be careful with VSH, check out our full research report (it’s free).
Rumble (RUM)
Trailing 12-Month Free Cash Flow Margin: -75.8%
Founded in 2013 as a champion for content creator rights and free expression, Rumble (NASDAQ: RUM) is a video sharing platform that positions itself as a free speech alternative to mainstream platforms, offering creators more favorable revenue-sharing opportunities.
Why Are We Hesitant About RUM?
- Subscale operations are evident in its revenue base of $102.4 million, meaning it has fewer distribution channels than its larger rivals (but more room for growth)
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Unprofitable operations could lead to additional rounds of dilutive equity financing if the credit window closes
Rumble is trading at $8.07 per share, or 18.8x trailing 12-month price-to-sales. If you’re considering RUM for your portfolio, see our FREE research report to learn more.
Peabody Energy (BTU)
Trailing 12-Month Free Cash Flow Margin: -4.7%
Beginning with a single wagon hauling coal in Illinois back when Grover Cleveland was president, Peabody Energy (NYSE: BTU) mines coal used by electricity generators and steel manufacturers.
Why Do We Avoid BTU?
- Sales tumbled by 2.7% annually over the last ten years, showing market trends are working against its favor during this cycle
- Costly operations and weak unit economics result in an inferior gross margin of 24.9% that must be offset through higher production volumes
- Efficiency has decreased over the last five years as its EBITDA margin fell by 25.1 percentage points
Peabody Energy’s stock price of $24.65 implies a valuation ratio of 3.8x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including BTU in your portfolio.
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