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 that don’t make the cut and some better opportunities instead.
nLIGHT (LASR)
Trailing 12-Month Free Cash Flow Margin: -2.9%
Founded by a former CEO and Harvard-educated entrepreneur Scott Keeneyn, nLIGHT (NASDAQ:LASR) offers semiconductor and fiber lasers to the industrial, aerospace & defense, and medical sectors.
Why Should You Sell LASR?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 5.8% annually over the last two years
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.7 percentage points
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
nLIGHT is trading at $18.66 per share, or 4.2x forward price-to-sales. Check out our free in-depth research report to learn more about why LASR doesn’t pass our bar.
Bally's (BALY)
Trailing 12-Month Free Cash Flow Margin: -4.6%
Headquartered in Providence, Rhode Island, Bally's Corporation (NYSE:BALY) is a diversified global casino-entertainment company that owns and manages casinos, resorts, and online gaming platforms.
Why Should You Dump BALY?
- Annual revenue growth of 2.9% over the last two years was below our standards for the consumer discretionary sector
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $9.74 per share, Bally's trades at 1.8x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than BALY.
Cogent (CCOI)
Trailing 12-Month Free Cash Flow Margin: -20%
Operating a massive network spanning 20,000 miles of fiber optic cable and connecting to over 3,200 buildings worldwide, Cogent Communications (NASDAQ:CCOI) provides high-speed Internet access, private network services, and data center colocation to businesses and bandwidth-intensive organizations across 54 countries.
Why Does CCOI Give Us Pause?
- 37.5 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
- Diminishing returns on capital suggest its earlier profit pools are drying up
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Cogent’s stock price of $47.49 implies a valuation ratio of 6.5x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including CCOI in your portfolio.
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