Companies with more cash than debt can be financially resilient, but that doesn’t mean they’re all strong investments. Some lack leverage because they struggle to grow or generate consistent profits, making them unattractive borrowers.
Just because a business has cash doesn’t mean it’s a good investment. Luckily, StockStory is here to help you separate the winners from the losers. Keeping that in mind, here are three companies with net cash positions to steer clear of and a few alternatives to consider.
Power Integrations (POWI)
Net Cash Position: $268.7 million (11.7% of Market Cap)
A leading supplier of parts for electronics such as home appliances, Power Integrations (NASDAQ: POWI) is a semiconductor designer and developer specializing in products used for high-voltage power conversion.
Why Are We Out on POWI?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Efficiency has decreased over the last five years as its operating margin fell by 15.7 percentage points
- Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 2.1% annually
Power Integrations’s stock price of $41.24 implies a valuation ratio of 29.2x forward P/E. Read our free research report to see why you should think twice about including POWI in your portfolio.
The Honest Company (HNST)
Net Cash Position: $63.34 million (16.8% of Market Cap)
Co-founded by actress Jessica Alba, The Honest Company (NASDAQ: HNST) sells diapers and wipes, skin care products, and household cleaning products.
Why Do We Pass on HNST?
- Modest revenue base of $389.8 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Free cash flow margin dropped by 6.6 percentage points over the last year, implying the company became more capital intensive as competition picked up
- Negative returns on capital show that some of its growth strategies have backfired
The Honest Company is trading at $3.42 per share, or 13.2x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why HNST doesn’t pass our bar.
Rogers (ROG)
Net Cash Position: $144.8 million (9.2% of Market Cap)
With roots dating back to 1832, making it one of America's oldest continuously operating companies, Rogers (NYSE: ROG) designs and manufactures specialized engineered materials and components used in electric vehicles, telecommunications, renewable energy, and other high-performance applications.
Why Is ROG Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 7% annually over the last two years
- Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 15.7% annually
- Free cash flow margin dropped by 5.4 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $87.50 per share, Rogers trades at 36.3x forward P/E. To fully understand why you should be careful with ROG, check out our full research report (it’s free for active Edge members).
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