While strong cash flow is a key indicator of stability, it doesn’t always translate to superior returns. Some cash-heavy businesses struggle with inefficient spending, slowing demand, or weak competitive positioning.
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 that don’t make the cut and some better opportunities instead.
SiteOne (SITE)
Trailing 12-Month Free Cash Flow Margin: 4.4%
Known for distributing John Deere tractors and LESCO turf care products, SiteOne Landscape Supply (NYSE: SITE) provides landscaping products and services to professionals, including irrigation, lighting, and nursery supplies.
Why Do We Think Twice About SITE?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Earnings per share fell by 4.9% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $129.87 per share, SiteOne trades at 28.6x forward P/E. To fully understand why you should be careful with SITE, check out our full research report (it’s free for active Edge members).
ePlus (PLUS)
Trailing 12-Month Free Cash Flow Margin: 3.9%
Starting as a financing company in 1990 before evolving into a full-service technology provider, ePlus (NASDAQ: PLUS) provides comprehensive IT solutions, professional services, and financing options to help organizations optimize their technology infrastructure and supply chain processes.
Why Does PLUS Worry Us?
- Sales were flat over the last two years, indicating it’s failed to expand this cycle
- Forecasted revenue decline of 2.1% for the upcoming 12 months implies demand will fall off a cliff
- Earnings per share have contracted by 5.5% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
ePlus’s stock price of $92.02 implies a valuation ratio of 20.3x forward P/E. If you’re considering PLUS for your portfolio, see our FREE research report to learn more.
Root (ROOT)
Trailing 12-Month Free Cash Flow Margin: 13.2%
Pioneering a data-driven approach that rewards good driving habits, Root (NASDAQ: ROOT) is a technology-driven auto insurance company that uses mobile apps to acquire customers and data science to price policies based on individual driving behavior.
Why Are We Cautious About ROOT?
- Policy losses and capital returns have eroded its book value per share this cycle as its book value per share declined by 158% annually over the last five years
- Negative return on equity shows management lost money while trying to expand the business
Root is trading at $83.46 per share, or 4x forward P/B. Check out our free in-depth research report to learn more about why ROOT doesn’t pass our bar.
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