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.
Luckily for you, we built StockStory to help you separate the good from the bad. That said, here are three cash-producing companies to avoid and some better opportunities instead.
Take-Two (TTWO)
Trailing 12-Month Free Cash Flow Margin: 3.3%
Best known for its Grand Theft Auto and NBA 2K franchises, Take Two (NASDAQ: TTWO) is one of the world’s largest video game publishers.
Why Are We Cautious About TTWO?
- Estimated sales growth of 5.5% for the next 12 months implies demand will slow from its three-year trend
- Earnings per share fell by 487% annually over the last three years while its revenue grew, partly because it diluted shareholders
- Negative free cash flow raises questions about the return timeline for its investments
Take-Two’s stock price of $246.50 implies a valuation ratio of 47.3x forward EV/EBITDA. If you’re considering TTWO for your portfolio, see our FREE research report to learn more.
Enphase (ENPH)
Trailing 12-Month Free Cash Flow Margin: 14.4%
The first company to successfully commercialize the solar micro-inverter, Enphase (NASDAQ: ENPH) manufactures software-driven home energy products.
Why Are We Hesitant About ENPH?
- Declining unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Earnings per share have dipped by 22.7% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Free cash flow margin shrank by 9.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $31.29 per share, Enphase trades at 15.1x forward P/E. Read our free research report to see why you should think twice about including ENPH in your portfolio.
Affirm (AFRM)
Trailing 12-Month Free Cash Flow Margin: 22.2%
Founded by PayPal co-founder Max Levchin with a mission to create honest financial products, Affirm (NASDAQ: AFRM) provides a payment network that allows consumers to make purchases and pay for them over time with transparent, flexible installment loans.
Why Is AFRM Not Exciting?
- Negative return on equity shows management lost money while trying to expand the business
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Affirm is trading at $68.10 per share, or 20.8x forward P/E. Check out our free in-depth research report to learn more about why AFRM doesn’t pass our bar.
Stocks We Like More
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