High-Cash-Burn Companies: Red Flags and Better Alternatives in 2025

Investors in 2025 face a critical challenge: distinguishing between companies that are reinvesting capital wisely and those that are hemorrhaging cash without clear value creation. Three stocks-Kura Sushi (KRUS), Graham Corporation (GHM), and Evolent Health (EVH)-stand out as cautionary tales of poor capital allocation. By analyzing their free cash flow, debt ratios, and return on invested capital (ROIC), we can identify red flags and explore smarter investment alternatives.

Kura Sushi (KRUS): A Restaurant Chain Struggling to Turn the Tide

Kura Sushi, a fast-casual sushi chain, reported a free cash flow of -$21.44 million in fiscal 2025, despite reducing its operating loss to $4.8 million from $11.5 million in 2024. This negative cash flow reflects persistent challenges in generating operating cash flows that outpace capital expenditures. While the company has no debt, its ROIC of 1.57% underscores a lack of profitability relative to invested capital. For context, the S&P 500's average ROIC typically exceeds 10%.

The company's declining comparable restaurant sales (-1.3% year-over-year) and consistent cash-burning pattern since 2018 raise concerns about its ability to sustain operations without external financing. Even with a debt-free balance sheet, KRUS's inability to generate positive free cash flow signals a high-risk profile for long-term investors.

Evolent Health (EVH): A Healthcare Tech Play with Dire Metrics

Evolent Health, a digital health platform, exemplifies a company with severe cash-burning issues. Its 2025 free cash flow of -$115.99 million dwarfs KRUS's deficit, while its debt-to-equity ratio of 1.29 indicates heavy reliance on debt financing. The company's ROIC of 0.15% is abysmal, suggesting minimal returns on capital-a red flag for investors prioritizing efficiency.

EVH's financials reveal a business model that prioritizes growth over profitability. While its digital health sector is promising, the lack of clear value creation metrics (e.g., customer acquisition cost vs. lifetime value) and unsustainable cash burn make it a high-risk bet. Without a path to positive cash flow, EVH's stock remains a speculative play rather than a sound investment.

Graham Corporation (GHM): Mixed Signals and Contradictory Metrics

Graham Corporation, a manufacturer of specialized industrial equipment, presents a paradox. While it reported $5.36 million in free cash flow for 2025, its trailing 12-month free cash flow margin of -4.7% and ROIC of 3.1% suggest ongoing cash burn. The company's debt-to-equity ratio of 4.96% is low, but its operating margin of 2.3% and subpar return on capital (3.1%) highlight operational inefficiencies.

GHM's recent revenue growth (21% in Q4 2025) is encouraging, but this must be weighed against its inconsistent cash flow. The company's pursuit of projects with ROIC exceeding 20% is aspirational, yet current metrics fail to justify optimism. For investors, GHM's mixed signals underscore the need for caution until its capital allocation practices align with its stated goals.

Red Flags to Watch For

1. Negative Free Cash Flow: All three companies exhibit cash outflows that exceed operating cash flows, signaling reliance on external financing or asset sales to fund operations.
2. Low ROIC: ROICs below 5% (as seen in KRUS and EVH) indicate poor capital efficiency, while GHM's 3.1% ROIC lags behind industry benchmarks.
3. High Debt Leverage: EVH's debt-to-equity ratio of 1.29 amplifies its financial risk, whereas KRUS's debt-free status masks underlying operational weaknesses.

Better Alternatives: Prioritizing Sustainable Value Creation

Investors seeking safer alternatives should focus on companies with positive free cash flow, low debt ratios, and ROIC exceeding 10%. For example:
- Consumer Discretionary Sector: Look for restaurant chains with consistent same-store sales growth and positive free cash flow, such as those with digital ordering systems or diversified menus.
- Healthcare Tech: Target platforms with clear monetization strategies, such as recurring revenue models or partnerships with insurers, to avoid EVH's speculative pitfalls.
- Industrial Manufacturing: Favor firms with strong operating margins and ROIC above 15%, ensuring capital is deployed effectively to drive long-term growth.

Conclusion

In 2025, the line between innovation and recklessness is thin. Kura Sushi, Graham Corporation, and Evolent Health illustrate how even companies with growth narratives can become cash-burning liabilities without disciplined capital management. By prioritizing metrics like free cash flow, debt leverage, and ROIC, investors can sidestep these traps and channel capital into businesses that deliver sustainable value.