Generating cash is essential for any business, but not all cash-rich companies are great investments. Some produce plenty of cash but fail to allocate it effectively, leading to missed opportunities.
Not all companies are created equal, and StockStory is here to surface the ones with real upside. That said, here are three cash-producing companies to avoid and some better opportunities instead.
Penguin Solutions (PENG)
Trailing 12-Month Free Cash Flow Margin: 7.3%
Based in the US, Penguin Solutions (NASDAQ: PENG) is a diversified semiconductor company offering memory, digital, and LED products.
Why Are We Out on PENG?
- 4% annual revenue growth over the last five years was slower than its semiconductor peers
- Gross margin of 29.1% reflects its high production costs
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 6.2% for the last two years
Penguin Solutions’s stock price of $19.69 implies a valuation ratio of 9.4x forward P/E. Read our free research report to see why you should think twice about including PENG in your portfolio.
Caesars Entertainment (CZR)
Trailing 12-Month Free Cash Flow Margin: 3.3%
Formerly Eldorado Resorts, Caesars Entertainment (NASDAQ: CZR) is a global gaming and hospitality company operating numerous casinos, hotels, and resort properties.
Why Is CZR Risky?
- Flat sales over the last two years suggest it must innovate and find new ways to grow
- Low free cash flow margin of 1.2% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $24.50 per share, Caesars Entertainment trades at 70.4x forward P/E. Dive into our free research report to see why there are better opportunities than CZR.
Global Industrial (GIC)
Trailing 12-Month Free Cash Flow Margin: 5.3%
Formerly known as Systemax, Global Industrial (NYSE: GIC) distributes industrial and commercial products to businesses and institutions.
Why Do We Pass on GIC?
- 4.9% annual revenue growth over the last two years was slower than its industrials peers
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 1.4% annually while its revenue grew
- Eroding returns on capital suggest its historical profit centers are aging
Global Industrial is trading at $29.69 per share, or 15.4x forward P/E. If you’re considering GIC for your portfolio, see our FREE research report to learn more.
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