Running at a loss can be a red flag. Many of these businesses face mounting challenges as competition increases and funding becomes harder to secure.

Finding the right unprofitable companies is difficult, which is why we started StockStory - to help you navigate the market. Keeping that in mind, here are three unprofitable companiesthat don’t make the cut and some better opportunities instead.

TreeHouse Foods (THS)

Trailing 12-Month GAAP Operating Margin: -4.5%

Whether it be packaged crackers, broths, or beverages, Treehouse Foods (NYSE: THS) produces a wide range of private-label foods for grocery and food service customers.

Why Do We Avoid THS?

1. Falling unit sales over the past two years suggest it might have to lower prices to stimulate growth
2. Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 6.4 percentage points
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its shrinking returns suggest its past profit sources are losing steam

TreeHouse Foods is trading at $24.48 per share, or 13.2x forward P/E. Read our free research report to see why you should think twice about including THS in your portfolio.

Sonos (SONO)

Trailing 12-Month GAAP Operating Margin: 0.1%

A pioneer in connected home audio systems, Sonos (NASDAQ: SONO) offers a range of premium wireless speakers and sound systems.

Why Do We Steer Clear of SONO?

1. Products and services fail to spark excitement with consumers, as seen in its flat sales over the last five years
2. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Sonos’s stock price of $17.05 implies a valuation ratio of 1.4x forward price-to-sales. Dive into our free research report to see why there are better opportunities than SONO.

Funko (FNKO)

Trailing 12-Month GAAP Operating Margin: -5%

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 Should You Sell FNKO?

1. 7.7% annual revenue growth over the last five years was slower than its consumer discretionary peers
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. 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

At $3.80 per share, Funko trades at 5.4x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why FNKO doesn’t pass our bar.

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