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. Keeping that in mind, here are three cash-burning companies to avoid and some better opportunities instead.
Funko (FNKO)
Trailing 12-Month Free Cash Flow Margin: -4%
Boasting partnerships with media franchises like Marvel and One Piece, Funko (NASDAQ: FNKO) is a company specializing in creating and distributing licensed pop culture collectibles.
Why Is FNKO Risky?
- 6.8% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Funko is trading at $3.49 per share, or 5.3x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than FNKO.
AerSale (ASLE)
Trailing 12-Month Free Cash Flow Margin: -8.7%
Providing a one-stop shop that integrates multiple services and product offerings, AerSale (NASDAQ: ASLE) delivers full-service support to mid-life commercial aircraft.
Why Are We Out on ASLE?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 31.4 percentage points
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $6.22 per share, AerSale trades at 9.4x forward P/E. If you’re considering ASLE for your portfolio, see our FREE research report to learn more.
GEO Group (GEO)
Trailing 12-Month Free Cash Flow Margin: -4.7%
With a global footprint spanning three continents and approximately 81,000 beds across 100 facilities, GEO Group (NYSE: GEO) operates secure facilities, processing centers, and reentry services for government agencies in the United States, Australia, and South Africa.
Why Are We Cautious About GEO?
- Sales trends were unexciting over the last five years as its 2.3% annual growth was below the typical business services company
- Expenses have increased as a percentage of revenue over the last four years as its adjusted operating margin fell by 6.3 percentage points
- 14.2 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
GEO Group’s stock price of $16.77 implies a valuation ratio of 13.7x forward P/E. To fully understand why you should be careful with GEO, check out our full research report (it’s free).
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