What a brutal six months it’s been for Xerox. The stock has dropped 63.1% and now trades at $3.98, rattling many shareholders. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Xerox, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Despite the more favorable entry price, we're swiping left on Xerox for now. Here are three reasons why XRX doesn't excite us and a stock we'd rather own.

Why Do We Think Xerox Will Underperform?

Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ: XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.

1. Revenue Spiraling Downwards

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Xerox’s demand was weak over the last five years as its sales fell at a 7.3% annual rate. This was below our standards and is a sign of poor business quality.

2. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Xerox’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Xerox’s $3.40 billion of debt exceeds the $576 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $503 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Xerox could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Xerox can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

We see the value of companies helping consumers, but in the case of Xerox, we’re out. After the recent drawdown, the stock trades at 3.1× forward price-to-earnings (or $3.98 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d recommend looking at the Amazon and PayPal of Latin America.

Stocks We Like More Than Xerox

Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.

While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.