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. That said, here are three cash-burning companies to avoid and some better opportunities instead.
ChargePoint (CHPT)
Trailing 12-Month Free Cash Flow Margin: -15.8%
The most prominent EV charging company during the COVID bull market, ChargePoint (NYSE: CHPT) is a provider of electric vehicle charging technology solutions in North America and Europe.
Why Does CHPT Give Us Pause?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1% annually over the last two years
- Cash-burning history makes us doubt the long-term viability of its business model
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
ChargePoint’s stock price of $9.97 implies a valuation ratio of 0.5x forward price-to-sales. If you’re considering CHPT for your portfolio, see our FREE research report to learn more.
GATX (GATX)
Trailing 12-Month Free Cash Flow Margin: -228%
Originally founded to ship beer, GATX (NYSE: GATX) provides leasing and management services for railcars and other transportation assets globally.
Why Does GATX Worry Us?
- Investments to defend its competitive moat have ramped up over the last five years as its free cash flow margin decreased by 178.9 percentage points
- ROIC of 3.8% reflects management’s challenges in identifying attractive investment opportunities
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
At $180.33 per share, GATX trades at 17.2x forward P/E. Dive into our free research report to see why there are better opportunities than GATX.
Tandem Diabetes (TNDM)
Trailing 12-Month Free Cash Flow Margin: -2.6%
With technology that automatically adjusts insulin delivery based on continuous glucose monitoring data, Tandem Diabetes Care (NASDAQ: TNDM) develops and manufactures automated insulin delivery systems that help people with diabetes manage their blood glucose levels.
Why Do We Think TNDM Will Underperform?
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 83.1% annually while its revenue grew
- Push for growth has led to negative returns on capital, signaling value destruction
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Tandem Diabetes is trading at $17.47 per share, or 18.2x forward EV-to-EBITDA. To fully understand why you should be careful with TNDM, check out our full research report (it’s free).
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