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.
Just because a company is spending heavily doesn’t mean it’s on the right track, and StockStory is here to separate the winners from the losers. That said, here are three cash-burning companies to avoid and some better opportunities instead.
Clarus (CLAR)
Trailing 12-Month Free Cash Flow Margin: -4.9%
Initially a financial services business, Clarus (NASDAQ: CLAR) designs, manufactures, and distributes outdoor equipment and lifestyle products.
Why Are We Out on CLAR?
- Flat sales over the last five years suggest it must innovate and find new ways to grow
- Negative free cash flow raises questions about the return timeline for its investments
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Clarus’s stock price of $3.06 implies a valuation ratio of 0.4x forward price-to-sales. If you’re considering CLAR for your portfolio, see our FREE research report to learn more.
Purple (PRPL)
Trailing 12-Month Free Cash Flow Margin: -3.3%
Founded by two brothers, Purple (NASDAQ: PRPL) creates sleep and home comfort products such as mattresses, pillows, and bedding accessories.
Why Should You Dump PRPL?
- Sales tumbled by 8.4% annually over the last five years, showing consumer trends are working against its favor
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Purple is trading at $0.42 per share, or 0.1x forward price-to-sales. Check out our free in-depth research report to learn more about why PRPL doesn’t pass our bar.
Moderna (MRNA)
Trailing 12-Month Free Cash Flow Margin: -72%
Rising to global prominence during the COVID-19 pandemic with one of the first effective vaccines, Moderna (NASDAQ: MRNA) develops messenger RNA (mRNA) medicines that direct the body's cells to produce proteins with therapeutic or preventive benefits for various diseases.
Why Do We Think MRNA Will Underperform?
- Annual sales declines of 34.3% for the past two years show its products and services struggled to connect with the market during this cycle
- Sales were less profitable over the last five years as its earnings per share fell by 46.5% annually, worse than its revenue declines
- Free cash flow margin dropped by 129.7 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $47.25 per share, Moderna trades at 9.9x forward price-to-sales. Dive into our free research report to see why there are better opportunities than MRNA.
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