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 to steer clear of and a few better alternatives.
AeroVironment (AVAV)
Trailing 12-month free cash flow margin: -1.2%
Focused on the future of autonomous military combat, AeroVironment (NASDAQ: AVAV) specializes in advanced unmanned aircraft systems and electric vehicle charging solutions.
Why Does AVAV Worry Us?
- Efficiency has decreased over the last five years as its operating margin fell by 12.4 percentage points
- Long-term business health is up for debate as its cash burn has increased over the last five years
- Negative returns on capital show management lost money while trying to expand the business
AeroVironment’s stock price of $122.82 implies a valuation ratio of 36.7x forward P/E. To fully understand why you should be careful with AVAV, check out our full research report (it’s free).
NeoGenomics (NEO)
Trailing 12-month free cash flow margin: -3.6%
Operating a network of CAP-accredited and CLIA-certified laboratories across the United States and United Kingdom, NeoGenomics (NASDAQ: NEO) provides specialized cancer diagnostic testing services, including genetic analysis, molecular testing, and pathology consultation for oncologists and healthcare providers.
Why Does NEO Give Us Pause?
- Revenue base of $787.8 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Negative returns on capital show that some of its growth strategies have backfired
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
NeoGenomics is trading at $16.43 per share, or 58x forward P/E. Dive into our free research report to see why there are better opportunities than NEO.
Liberty Energy (LBRT)
Trailing 12-month free cash flow margin: -14.7%
Operating approximately 40 active fleets across North America's most productive shale basins, Liberty Energy (NYSE: LBRT) provides hydraulic fracturing services that help oil and gas companies extract resources from shale formations.
Why Is LBRT Not Exciting?
- Gross margin of 23.4% reflects its high production costs and unfavorable asset base
- Expenses have increased as a percentage of revenue over the last five years as its EBITDA margin fell by 3.3 percentage points
- Poor free cash flow margin of 0% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $14.80 per share, Liberty Energy trades at 214.9x forward P/E. If you’re considering LBRT for your portfolio, see our FREE research report to learn more.
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