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. Keeping that in mind, here are three cash-burning companies to steer clear of and a few better alternatives.
LGI Homes (LGIH)
Trailing 12-Month Free Cash Flow Margin: -7.8%
Based in Texas, LGI Homes (NASDAQ:LGIH) is a homebuilding company specializing in constructing affordable, entry-level single-family homes in desirable communities across the United States.
Why Do We Steer Clear of LGIH?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 10.4% declines over the past two years
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
LGI Homes’s stock price of $67.34 implies a valuation ratio of 10.2x forward P/E. If you’re considering LGIH for your portfolio, see our FREE research report to learn more.
Guardant Health (GH)
Trailing 12-Month Free Cash Flow Margin: -32.8%
Pioneering the field of "liquid biopsy" with technology that can identify cancer-specific genetic mutations from a simple blood draw, Guardant Health (NASDAQ:GH) develops blood tests that detect and monitor cancer by analyzing tumor DNA in the bloodstream, helping doctors make treatment decisions without invasive biopsies.
Why Does GH Fall Short?
- Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 19.6% annually
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Guardant Health is trading at $58.20 per share, or 7.2x forward price-to-sales. Check out our free in-depth research report to learn more about why GH doesn’t pass our bar.
Maximus (MMS)
Trailing 12-Month Free Cash Flow Margin: -2.6%
With nearly 50 years of experience translating public policy into operational programs that serve millions of citizens, Maximus (NYSE:MMS) provides operational services, clinical assessments, and technology solutions to government agencies in the U.S. and internationally.
Why Do We Think Twice About MMS?
- Estimated sales growth of 1.9% for the next 12 months implies demand will slow from its two-year trend
- Free cash flow margin dropped by 11.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $84.98 per share, Maximus trades at 13x forward P/E. Dive into our free research report to see why there are better opportunities than MMS.
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