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.
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 avoid and some better opportunities instead.
Couchbase (BASE)
Trailing 12-Month Free Cash Flow Margin: -12.7%
Formed in 2011 with the merger of Membase and CouchOne, Couchbase (NASDAQ: BASE) is a database-as-a-service platform that allows enterprises to store large volumes of semi-structured data.
Why Is BASE Not Exciting?
- Offerings struggled to generate meaningful interest as its average billings growth of 6.6% over the last year did not impress
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Cash burn makes us question whether it can achieve sustainable long-term growth
Couchbase is trading at $24.43 per share, or 5.5x forward price-to-sales. Dive into our free research report to see why there are better opportunities than BASE.
LGI Homes (LGIH)
Trailing 12-Month Free Cash Flow Margin: -8.2%
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?
- Sales pipeline suggests its future revenue growth likely won’t meet our standards as its backlog hasn’t budged over the past two years
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
LGI Homes’s stock price of $51.52 implies a valuation ratio of 6.7x forward P/E. If you’re considering LGIH for your portfolio, see our FREE research report to learn more.
SoundHound AI (SOUN)
Trailing 12-Month Free Cash Flow Margin: -104%
Founded in 2005, SoundHound AI (NASDAQ: SOUN) develops independent voice artificial intelligence solutions that enable businesses across various industries to offer customized conversational experiences to consumers.
Why Does SOUN Give Us Pause?
- Gross margin of 44.1% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Efficiency fell over the last year as its operating margin declined by 39 percentage points because it pursued growth instead of profits
- Cash-burning history makes us doubt the long-term viability of its business model
At $10.75 per share, SoundHound AI trades at 27.1x forward price-to-sales. To fully understand why you should be careful with SOUN, check out our full research report (it’s free).
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