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.

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.

Sportsman's Warehouse (SPWH)

Trailing 12-Month Free Cash Flow Margin: -3.3%

A go-to destination for individuals passionate about hunting, fishing, camping, hiking, shooting sports, and more, Sportsman's Warehouse (NASDAQ: SPWH) is an American specialty retailer offering a diverse range of active gear, equipment, and apparel.

Why Is SPWH Risky?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
2. Performance over the past three years was negatively impacted by new share issuances as its earnings per share dropped by 32.6% annually, worse than its revenue
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

At $1.38 per share, Sportsman's Warehouse trades at 21x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than SPWH.

Clarus (CLAR)

Trailing 12-Month Free Cash Flow Margin: -4%

Initially a financial services business, Clarus (NASDAQ: CLAR) designs, manufactures, and distributes outdoor equipment and lifestyle products.

Why Do We Steer Clear of CLAR?

1. 2.3% annual revenue growth over the last five years was slower than its consumer discretionary peers
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Clarus is trading at $2.69 per share, or 16.1x forward P/E. To fully understand why you should be careful with CLAR, check out our full research report (it’s free).

Dave & Buster's (PLAY)

Trailing 12-Month Free Cash Flow Margin: -9.3%

Founded by a former game parlor and bar operator, Dave & Buster’s (NASDAQ: PLAY) operates a chain of arcades providing immersive entertainment experiences.

Why Do We Avoid PLAY?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

Dave & Buster’s stock price of $13.50 implies a valuation ratio of 17.2x forward P/E. Check out our free in-depth research report to learn more about why PLAY doesn’t pass our bar.

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