Simply Good Foods has been treading water for the past six months, recording a small loss of 2.3% while holding steady at $33.11.

Is there a buying opportunity in Simply Good Foods, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

We're swiping left on Simply Good Foods for now. Here are three reasons why we avoid SMPL and a stock we'd rather own.

Why Is Simply Good Foods Not Exciting?

Best known for its Atkins brand that was inspired by the popular diet of the same name, Simply Good Foods (NASDAQ: SMPL) is a packaged food company whose offerings help customers achieve their healthy eating or weight loss goals.

1. Fewer Distribution Channels Limit its Ceiling

With $1.36 billion in revenue over the past 12 months, Simply Good Foods is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers. On the bright side, it can grow faster because it has a longer list of untapped store chains to sell into.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Simply Good Foods’s margin dropped by 1.6 percentage points over the last year. Continued declines could signal it is in the middle of an investment cycle. Simply Good Foods’s free cash flow margin for the trailing 12 months was 14.3%.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Simply Good Foods historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.8%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+.

Final Judgment

Simply Good Foods isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 17.3× forward price-to-earnings (or $33.11 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.

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