3 Reasons Why Avis Budget Group is a Risky Investment and 1 Stock to Consider Instead

In the past six months, Avis Budget Group has experienced a significant 45.8% increase in its stock price, reaching a new 52-week high of $130 per share. However, despite this impressive run-up, our analysts are cautious about including the company in your portfolio for the following reasons: Firstly, the company's growth in available rental days for car rental has been underwhelming. While both price and volume are important for revenue growth, the latter is the most critical to analyze for companies like Avis Budget Group. The latest quarterly data shows that available rental days for car rental came in at 56.82 million, with an average of 2% year-on-year growth over the last two years. This underwhelming performance suggests that the company may have to lower prices or invest in product improvements to accelerate growth, which can hinder near-term profitability. Secondly, new investments have failed to bear fruit as return on invested capital (ROIC) has declined. ROIC is a metric that shows how much operating profit a company generates relative to the money it has raised (debt and equity). Unfortunately, Avis Budget Group's ROIC has decreased over the last few years, which is a symptom of fewer profitable growth opportunities. While management has done well in the past, the declining returns suggest that there are better opportunities elsewhere. Lastly, the company's short cash runway exposes shareholders to potential dilution. As long-term investors, we care most about the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. Avis Budget Group burned through $1.28 billion of cash over the last year, and its $5.94 billion of debt exceeds the $516 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble. Unless the company's fundamentals change quickly, it may find itself in a position where it must raise capital from investors to continue operating, which could be unfavorable for shareholder returns. In conclusion, while Avis Budget Group's valuation is reasonable at 4× forward EV-to-EBITDA (or $130 per share), its shaky fundamentals present too much downside risk. There are better stocks to buy right now. Our Top 9 Market-Beating Stocks list includes high-quality stocks that have generated a market-beating return of 183% over the last five years. Take advantage of Mr. Market and find your next big winner with StockStory today.