A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.

Luckily for you, we built StockStory to help you separate the good from the bad. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.

Agilysys (AGYS)

Trailing 12-Month Free Cash Flow Margin: 18.7%

With a tech stack that powers everything from check-in to checkout at some of the world's top hospitality venues, Agilysys (NASDAQ: AGYS) develops and provides cloud-based and on-premise software solutions for hotels, resorts, casinos, and restaurants to manage operations and enhance guest experiences.

Why Are We Hesitant About AGYS?

1. 15.5% annual revenue growth over the last five years was slower than its software peers
2. Gross margin of 61.8% is below its competitors, leaving less money to invest in areas like marketing and R&D
3. Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage

Agilysys is trading at $128.52 per share, or 10.7x forward price-to-sales. Dive into our free research report to see why there are better opportunities than AGYS.

Trex (TREX)

Trailing 12-Month Free Cash Flow Margin: 2%

Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company (NYSE: TREX) makes wood-alternative decking, railing, and patio furniture.

Why Do We Avoid TREX?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6.1 percentage points
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Trex’s stock price of $32.97 implies a valuation ratio of 20.5x forward P/E. If you’re considering TREX for your portfolio, see our FREE research report to learn more.

Penumbra (PEN)

Trailing 12-Month Free Cash Flow Margin: 11.4%

Founded in 2004 to address challenging medical conditions with significant unmet needs, Penumbra (NYSE: PEN) develops and manufactures innovative medical devices for treating vascular diseases and providing immersive healthcare rehabilitation solutions.

Why Does PEN Fall Short?

1. Revenue base of $1.33 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 4.8% for the last five years
3. Low returns on capital reflect management’s struggle to allocate funds effectively

At $280.13 per share, Penumbra trades at 59.5x forward P/E. Read our free research report to see why you should think twice about including PEN in your portfolio.

Stocks We Like More

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