Rapid spending isn’t always a sign of progress. Some cash-burning businesses fail to convert investments into meaningful competitive advantages, leaving them vulnerable.
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.
Boeing (BA)
Trailing 12-Month Free Cash Flow Margin: -2.1%
One of the companies that forms a duopoly in the commercial aircraft market, Boeing (NYSE: BA) develops, manufactures, and services commercial airplanes, defense products, and space systems.
Why Are We Cautious About BA?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 7.2% over the last two years was below our standards for the industrials sector
- Persistent operating margin losses suggest the business manages its expenses poorly
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
Boeing’s stock price of $209.31 implies a valuation ratio of 830.6x forward P/E. If you’re considering BA for your portfolio, see our FREE research report to learn more.
MDU Resources (MDU)
Trailing 12-Month Free Cash Flow Margin: -15.8%
Founded to provide electricity to towns in Minnesota, MDU Resources (NYSE: MDU) provides products and services in the utilities and construction materials industries.
Why Do We Avoid MDU?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 19.5% annually over the last five years
- Earnings per share have dipped by 15.9% annually over the past four years, which is concerning because stock prices follow EPS over the long term
- Free cash flow margin dropped by 13 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $20.86 per share, MDU Resources trades at 21.8x forward P/E. To fully understand why you should be careful with MDU, check out our full research report (it’s free).
Purple (PRPL)
Trailing 12-Month Free Cash Flow Margin: -6.2%
Founded by two brothers, Purple (NASDAQ: PRPL) creates sleep and home comfort products such as mattresses, pillows, and bedding accessories.
Why Do We Think PRPL Will Underperform?
- Annual revenue declines of 5.3% over the last five years indicate problems with its market positioning
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Purple is trading at $0.71 per share, or 17.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why PRPL doesn’t pass our bar.
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