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. Keeping that in mind, here are three cash-burning companies to steer clear of and a few better alternatives.
Vital Farms (VITL)
Trailing 12-Month Free Cash Flow Margin: -13.9%
With an emphasis on ethically produced products, Vital Farms (NASDAQ:VITL) specializes in pasture-raised eggs and butter.
Why Should You Sell VITL?
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 10.3 percentage points
- Incremental sales over the last three years were much less profitable as its earnings per share fell by 17.2% annually while its revenue grew
- Free cash flow margin dropped by 13.6 percentage points over the last year, implying the company became more capital intensive as competition picked up
At $10.97 per share, Vital Farms trades at 15.1x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why VITL doesn’t pass our bar.
RXO (RXO)
Trailing 12-Month Free Cash Flow Margin: -1.2%
With access to millions of trucks, RXO (NYSE:RXO) offers full-truckload, less-than-truckload, and last-mile deliveries.
Why Do We Pass on RXO?
- Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
- 5.3 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
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
RXO’s stock price of $20.78 implies a valuation ratio of 67.3x forward P/E. Dive into our free research report to see why there are better opportunities than RXO.
WEBTOON (WBTN)
Trailing 12-Month Free Cash Flow Margin: -1%
Pioneering a vertical-scrolling format optimized for mobile devices, WEBTOON Entertainment (NASDAQ:WBTN) operates a global platform where creators publish serialized web-comics and web-novels that users can read in bite-sized episodes.
Why Is WBTN Not Exciting?
- 2.6% annual revenue growth over the last two years was slower than its business services peers
- Falling earnings per share over the last one years has some investors worried as stock prices ultimately follow EPS over the long term
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.8% for the last four years
WEBTOON is trading at $10.52 per share, or 99.5x forward P/E. If you’re considering WBTN for your portfolio, see our FREE research report to learn more.
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