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.

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 to avoid and some better opportunities instead.

Kura Sushi (KRUS)

Trailing 12-Month Free Cash Flow Margin: -9.2%

Known for its conveyor belt that transports dishes to diners, Kura Sushi (NASDAQ: KRUS) is a chain of sushi restaurants serving traditional Japanese fare with a touch of modernity and technology.

Why Should You Dump KRUS?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
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

Kura Sushi is trading at $60.17 per share, or 37.6x forward EV-to-EBITDA. If you’re considering KRUS for your portfolio, see our FREE research report to learn more.

First Watch (FWRG)

Trailing 12-Month Free Cash Flow Margin: -2.5%

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 Wary of FWRG?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
2. Cash burn has widened over the last year, making us question whether it can reliably generate shareholder value
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

At $11.32 per share, First Watch trades at 56.1x forward P/E. To fully understand why you should be careful with FWRG, check out our full research report (it’s free).

PENN Entertainment (PENN)

Trailing 12-Month Free Cash Flow Margin: -2%

Established in 1982, PENN Entertainment (NASDAQ: PENN) is a diversified American operator of casinos, sports betting, and entertainment venues.

Why Do We Avoid PENN?

1. Annual revenue growth of 14.2% over the last five years was below our standards for the consumer discretionary sector
2. Negative free cash flow raises questions about the return timeline for its investments
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

PENN Entertainment’s stock price of $15.32 implies a valuation ratio of 17.7x forward P/E. Check out our free in-depth research report to learn more about why PENN doesn’t pass our bar.

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