A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. That said, here are three cash-producing companies to steer clear of and a few better alternatives.
Amtech (ASYS)
Trailing 12-Month Free Cash Flow Margin: 12.3%
Focusing on the silicon carbide and power semiconductor sectors, Amtech Systems (NASDAQ: ASYS) produces the machinery and related chemicals needed for manufacturing semiconductors.
Why Are We Wary of ASYS?
- Annual sales declines of 14.9% for the past two years show its products and services struggled to connect with the market during this cycle
- Poor expense management has led to an operating margin of -0.7% that is below the industry average
- Underwhelming -0.8% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its decreasing returns suggest its historical profit centers are aging
Amtech is trading at $22.48 per share, or 4.3x trailing 12-month price-to-sales. Read our free research report to see why you should think twice about including ASYS in your portfolio.
Knowles (KN)
Trailing 12-Month Free Cash Flow Margin: 14.8%
With roots dating back to 1946 and a focus on components that must perform flawlessly in critical situations, Knowles (NYSE: KN) designs and manufactures specialized electronic components like high-performance capacitors, microphones, and speakers for medical technology, defense, and industrial applications.
Why Do We Steer Clear of KN?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 5.2% annually over the last five years
- Smaller revenue base of $614.1 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 5.2% annually
Knowles’s stock price of $40 implies a valuation ratio of 30.3x forward P/E. If you’re considering KN for your portfolio, see our FREE research report to learn more.
Fortrea (FTRE)
Trailing 12-Month Free Cash Flow Margin: 7%
Spun off from Labcorp in 2023 to focus exclusively on clinical research services, Fortrea (NASDAQ: FTRE) is a contract research organization that helps pharmaceutical, biotech, and medical device companies develop and bring their products to market through clinical trials and support services.
Why Should You Sell FTRE?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 3.1% annually over the last four years
- Negative returns on capital show management lost money while trying to expand the business, and its shrinking returns suggest its past profit sources are losing steam
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $15.93 per share, Fortrea trades at 20.1x forward P/E. To fully understand why you should be careful with FTRE, check out our full research report (it’s free).
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