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.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. Keeping that in mind, here are three cash-producing companies to steer clear of and a few better alternatives.
Amtech (ASYS)
Trailing 12-Month Free Cash Flow Margin: 7.4%
Focusing on the silicon carbide and power semiconductor sectors, Amtech Systems (NASDAQ: ASYS) produces the machinery and related chemicals needed for manufacturing semiconductors.
Why Is ASYS Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 15.8% annually over the last two years
- Persistent operating margin losses suggest the business manages its expenses poorly
- Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 17.8% annually
Amtech’s stock price of $7.85 implies a valuation ratio of 60.4x forward P/E. If you’re considering ASYS for your portfolio, see our FREE research report to learn more.
Herc (HRI)
Trailing 12-Month Free Cash Flow Margin: 5.6%
Formerly a subsidiary of Hertz Corporation and with a logo that still bears some similarities to its former parent, Herc Holdings (NYSE: HRI) provides equipment rental and related services to a wide range of industries.
Why Does HRI Worry Us?
- Earnings per share fell by 15.2% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Free cash flow margin shrank by 9.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $134.27 per share, Herc trades at 17.7x forward P/E. Check out our free in-depth research report to learn more about why HRI doesn’t pass our bar.
ICU Medical (ICUI)
Trailing 12-Month Free Cash Flow Margin: 3.1%
Founded in 1984 and named for its initial focus on intensive care units, ICU Medical (NASDAQ: ICUI) develops and manufactures medical products for infusion therapy, vascular access, and vital care applications used in hospitals and other healthcare settings.
Why Should You Dump ICUI?
- Sales trends were unexciting over the last two years as its 1.5% annual growth was below the typical healthcare company
- Projected sales decline of 8.5% for the next 12 months points to a tough demand environment ahead
- Free cash flow margin dropped by 11.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up
ICU Medical is trading at $148.52 per share, or 20x forward P/E. To fully understand why you should be careful with ICUI, check out our full research report (it’s free for active Edge members).
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