Although the burned hand learns best, we shouldn't have to wear oven mitts to cook up a decent return on our investments. The excitement of getting in early on the next hot growth stock or catching an established company rebounding from a bad fall continuously lures us into the hothouse of the marketplace. The goal is to find those companies that really are ready to shake and bake, as opposed to those that will simply singe our portfolios.

So let's don our asbestos aprons and whip up some lessons to keep us from getting burned. We'll check on some of Mr. Market's favorites and see how fast they're burning through their cash. Then we'll consult Motley Fool CAPS to see which of these stocks Foolish investors think are overdone.

Blackened or burnt?
A company's cash burn rate measures how fast it's using up its cash. The business can look profitable on paper, while actually sucking the company dry of cash. That's why Fools focus on the cash flow statement more than the income statement.

We also want to check on a company's working capital to see how much money it needs to pay its bills. By dividing working capital by its cash burn, we can see how long it will be before the company needs to raise more money.

Cash Burn*

Working Capital

Months of Solvency**

CAPS Rating

Las Vegas Sands (NYSE:LVS)

$176.80

$359

2

***

Acorda Therapeutics (NASDAQ:ACOR)

$2.40

$5.50

2

*

Tenet Healthcare (NYSE:THC)

$98.60

$1,100

11

*

XM Satellite (NASDAQ:XMSR)

$61.40

($261.60)

Insolvent!

*

Healthsouth (NYSE:HLS)

$18.30

($381.30)

Insolvent!

*

*Cash burn is monthly negative TTM FCF.
**Months of solvency is working capital/cash burn. CAPS Ratings from Motley Fool CAPS.

So few options, so little time
Not every company with high cash burn rates is going to go bankrupt, but they do become riskier. Companies that find themselves burning through their cash too quickly, however, only have a handful of options available:

  • Get profitable.
  • Raise more cash through equity or debt offerings.
  • Hit up private financiers for cash.
  • Get bought out.
  • Declare bankruptcy.

Consider that Las Vegas Sands needs to invest heavily in its casinos and continues to expand in Macao and China. That would account for the large capital expenditures. Acorda Therapeutics, on the other hand, has a potentially successful drug for treatment of central nervous system disorders that may very well win FDA approval -- which would in turn make it easier to get additional financing. But will that justify a 900% stock price increase in just seven months?

Crispy critters
From our list of candidates, we see that two companies are already functionally insolvent. The cash positions at XM Satellite and Healthsouth are out of control, with current liabilities far outweighing their current assets. It also just might explain why XM so desperately wants to merge with Sirius Satellite (NASDAQ:SIRI).

Yet when we look at Sirius, we see that it isn't in any better shape than its rival. It's burning through its cash at a rate of $43 million a month and its working capital position is only slightly better than XM's. A merger of the two companies might be the only thing that can save them, but if regulators fail to approve the deal, it could come down to which can hang onto life support the longest. That's not an inspiring prognosis for an investment, but it does explain why XM has only a one-star rating from Motley Fool CAPS.

A fall from the sky
CAPS players are about evenly split on whether XM will outperform the market, with bulls just edging out the bears. However, among CAPS All-Stars -- investors who are consistently right more often than 85% all other players in the CAPS universe -- they see lousy reception for the satellite radio broadcaster, at a rate of three to two.

  • Top-rated Fool TMFEldrehad believes the key to XM's problems (and Sirius', too) lies with content production. XM doesn't control it. "The real drivers of this value chain, the content creators, are in a position to extract any outsized profits the distributors might gain and keep them for themselves. That's the problem with this whole business model. XMSR and SIRI are in the distribution business. Unless they can do what HBO has effectively done and control the content creation portion of the business ... they are never going to reap the kind of outsized returns that their present valuations are based on."
  • kristm agrees, noting, "you have to realize that all these exclusive content deals are seriously increasing the cost of each new customer the company adds."
  • CAPS All-Star Jeffreyw, whom we've turned to before for stock insights, sees the proposed merger as key to any chance of success. A "merger would make both able to streamline and become profitable. Both would no longer compete for radio 'talent' and team exclusives, making them less likely to overpay for untalented sleaze or sports franchises." However, as beneficial as that might be, a "merger is unlikely to get FCC approval and both will tank on that news."

Soup's on!
You've heard from the CAPS All-Stars -- now it's your turn to stir the pot. Tell the CAPS community what you have to say. At Motley Fool CAPS, having too many cooks doesn't spoil the soup, it just improves the flavor. So get in the mix right away with your completely free registration.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.