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. Keeping that in mind, here are three cash-producing companies to steer clear of and a few better alternatives.

Shake Shack (SHAK)

Trailing 12-Month Free Cash Flow Margin: 3.1%

Started as a hot dog cart in New York City's Madison Square Park, Shake Shack (NYSE: SHAK) is a fast-food restaurant known for its burgers and milkshakes.

Why Does SHAK Give Us Pause?

1. Poor expense management has led to an operating margin of 0.6% that is below the industry average
2. Low free cash flow margin of 1.6% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
3. Negative returns on capital show management lost money while trying to expand the business

At $137.77 per share, Shake Shack trades at 103.7x forward P/E. Read our free research report to see why you should think twice about including SHAK in your portfolio.

Church & Dwight (CHD)

Trailing 12-Month Free Cash Flow Margin: 15.3%

Best known for its Arm & Hammer baking soda, Church & Dwight (NYSE: CHD) is a household and personal care products company with a vast portfolio that spans laundry detergent to toothbrushes to hair removal creams.

Why Are We Hesitant About CHD?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Estimated sales growth of 1.5% for the next 12 months implies demand will slow from its three-year trend
3. Efficiency has decreased over the last year as its operating margin fell by 4.9 percentage points

Church & Dwight is trading at $97.06 per share, or 25.8x forward P/E. If you’re considering CHD for your portfolio, see our FREE research report to learn more.

Grid Dynamics (GDYN)

Trailing 12-Month Free Cash Flow Margin: 7.5%

With engineering centers across the Americas, Europe, and India serving Fortune 1000 companies, Grid Dynamics (NASDAQ: GDYN) provides technology consulting, engineering, and analytics services to help large enterprises modernize their technology systems and business processes.

Why Does GDYN Fall Short?

1. Revenue base of $371.2 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
2. Earnings per share fell by 8.5% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
3. Push for growth has led to negative returns on capital, signaling value destruction

Grid Dynamics’s stock price of $11 implies a valuation ratio of 27.4x forward P/E. Check out our free in-depth research report to learn more about why GDYN doesn’t pass our bar.

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