3 Cash-Burning Stocks We Approach with Caution

While some companies burn cash to fuel expansion, others struggle to turn spending into sustainable growth. A high cash burn rate without a strong balance sheet can leave investors exposed to significant downside.

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. Keeping that in mind, here are three cash-burning companies that don’t make the cut and some better opportunities instead.

First Watch (FWRG)

Trailing 12-Month Free Cash Flow Margin: -2.4%

Based on a nautical reference to the first work shift aboard a ship, First Watch (NASDAQ:FWRG) is a chain of breakfast and brunch restaurants whose menu is heavily-focused on eggs and griddle items such as pancakes.

Why Are We Hesitant About FWRG?

1. Long-term business health is up for debate as its cash burn has increased over the last year
2. ROIC of 2.2% reflects management’s challenges in identifying attractive investment opportunities
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

At $17.42 per share, First Watch trades at 44.5x forward P/E. To fully understand why you should be careful with FWRG, check out our full research report (it’s free).

Trex (TREX)

Trailing 12-Month Free Cash Flow Margin: -9.9%

Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company (NYSE:TREX) makes wood-alternative decking, railing, and patio furniture.

Why Does TREX Worry Us?

1. Muted 5.4% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
2. Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable
3. Eroding returns on capital suggest its historical profit centers are aging

Trex is trading at $64.34 per share, or 29.9x forward P/E. Dive into our free research report to see why there are better opportunities than TREX.

Byrna (BYRN)

Trailing 12-Month Free Cash Flow Margin: -8.3%

Providing civilians with tools to disable, disarm, and deter would-be assailants, Byrna (NASDAQ:BYRN) is a provider of non-lethal weapons.

Why Are We Wary of BYRN?

1. Suboptimal cost structure is highlighted by its history of operating margin losses
2. Cash-burning history makes us doubt the long-term viability of its business model
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

Byrna’s stock price of $22.37 implies a valuation ratio of 50.4x forward EV-to-EBITDA. If you’re considering BYRN for your portfolio, see our FREE research report to learn more.

High-Quality Stocks for All Market Conditions

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