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.
Not all companies are worth the risk, and that’s why we built StockStory - to help you spot the red flags. That said, 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: -2.9%
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?
- Annual sales declines of 5% for the past two years show its products and services struggled to connect with the market during this cycle
- High input costs result in an inferior gross margin of 20.3% that must be offset through higher volumes
- Long-term business health is up for debate as its cash burn has increased over the last five years
Vishay Intertechnology is trading at $16.81 per share, or 28.5x forward P/E. If you’re considering VSH for your portfolio, see our FREE research report to learn more.
Advance Auto Parts (AAP)
Trailing 12-Month Free Cash Flow Margin: -3.5%
Founded in Virginia in 1932, Advance Auto Parts (NYSE: AAP) is an auto parts and accessories retailer that sells everything from carburetors to motor oil to car floor mats.
Why Should You Dump AAP?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Issuance of new shares over the last three years caused its earnings per share to fall by 44.3% annually, even worse than its revenue declines
- High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Advance Auto Parts’s stock price of $50.55 implies a valuation ratio of 18.4x forward P/E. Read our free research report to see why you should think twice about including AAP in your portfolio.
Sunrun (RUN)
Trailing 12-Month Free Cash Flow Margin: -14.3%
Helping homeowners use solar energy to power their homes, Sunrun (NASDAQ: RUN) provides residential solar electricity, specializing in panel installation and leasing services.
Why Does RUN Worry Us?
- Historical operating margin losses point to an inefficient cost structure
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- 23× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $11.27 per share, Sunrun trades at 41.3x forward P/E. To fully understand why you should be careful with RUN, check out our full research report (it’s free).
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