What a time it’s been for Enviri. In the past six months alone, the company’s stock price has increased by a massive 54.5%, reaching $18.17 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Enviri, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Enviri Will Underperform?

Despite the momentum, we're swiping left on Enviri for now. Here are three reasons there are better opportunities than NVRI and a stock we'd rather own.

1. Revenue Tumbling Downwards

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Enviri’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 2.7% over the last two years.

2. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Enviri’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.8%, meaning it lit $1.83 of cash on fire for every $100 in revenue.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Enviri’s $1.63 billion of debt exceeds the $125.3 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $276.1 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Enviri could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Enviri can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Enviri doesn’t pass our quality test. Following the recent surge, the stock trades at 14.1× forward EV-to-EBITDA (or $18.17 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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