Rapid spending isn’t always a sign of progress. Some cash-burning businesses fail to convert investments into meaningful competitive advantages, leaving them vulnerable.

Not all companies are worth the risk, and that’s why we built StockStory - to help you spot the red flags. Keeping that in mind, here are three cash-burning companies to avoid and some better opportunities instead.

Funko (FNKO)

Trailing 12-Month Free Cash Flow Margin: -1.7%

Boasting partnerships with media franchises like Marvel and One Piece, Funko (NASDAQ: FNKO) is a company specializing in creating and distributing licensed pop culture collectibles.

Why Is FNKO Risky?

1. Products and services aren't resonating with the market as its revenue declined by 9.7% annually over the last two years
2. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

At $2.76 per share, Funko trades at 13.6x forward P/E. Check out our free in-depth research report to learn more about why FNKO doesn’t pass our bar.

Redwire (RDW)

Trailing 12-Month Free Cash Flow Margin: -58.2%

Based in Jacksonville, Florida, Redwire (NYSE: RDW) is a provider of systems and components used in space infrastructure.

Why Do We Avoid RDW?

1. Historically negative EPS casts doubt for cautious investors and clouds its long-term earnings prospects
2. Free cash flow margin dropped by 27.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

Redwire is trading at $8.96 per share, or 10.2x forward EV-to-EBITDA. To fully understand why you should be careful with RDW, check out our full research report (it’s free).

Fortrea (FTRE)

Trailing 12-Month Free Cash Flow Margin: -3.8%

Spun off from Labcorp in 2023 to focus exclusively on clinical research services, Fortrea (NASDAQ: FTRE) is a contract research organization that helps pharmaceutical, biotech, and medical device companies develop and bring their products to market through clinical trials and support services.

Why Do We Think FTRE Will Underperform?

1. Sales tumbled by 3.6% annually over the last two years, showing market trends are working against its favor during this cycle
2. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Fortrea’s stock price of $8.03 implies a valuation ratio of 13.3x forward P/E. Dive into our free research report to see why there are better opportunities than FTRE.

Stocks We Like More

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