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.

Not all companies are created equal, and StockStory is here to surface the ones with real upside. That said, here are three cash-producing companies to avoid and some better opportunities instead.

Kulicke and Soffa (KLIC)

Trailing 12-Month Free Cash Flow Margin: 18.4%

Headquartered in Singapore, Kulicke & Soffa (NASDAQ: KLIC) is a provider of production equipment and tools used to assemble semiconductor devices

Why Do We Avoid KLIC?

1. Sales tumbled by 10.8% annually over the last two years, showing market trends are working against its favor during this cycle
2. Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 23.4 percentage points
3. Earnings per share have dipped by 20.3% annually over the past five years, which is concerning because stock prices follow EPS over the long term

Kulicke and Soffa’s stock price of $42.96 implies a valuation ratio of 40.3x forward P/E. If you’re considering KLIC for your portfolio, see our FREE research report to learn more.

Plexus (PLXS)

Trailing 12-Month Free Cash Flow Margin: 6.2%

With over 20,000 team members across 26 global facilities, Plexus (NASDAQ: PLXS) designs, manufactures, and services complex electronic products for companies in aerospace/defense, healthcare, and industrial sectors.

Why Is PLXS Not Exciting?

1. Sales tumbled by 3.4% annually over the last two years, showing market trends are working against its favor during this cycle
2. Poor free cash flow margin of 2.7% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Eroding returns on capital suggest its historical profit centers are aging

Plexus is trading at $146 per share, or 19.5x forward P/E. Check out our free in-depth research report to learn more about why PLXS doesn’t pass our bar.

CooperCompanies (COO)

Trailing 12-Month Free Cash Flow Margin: 10.2%

With a history dating back to 1958 and a portfolio spanning two distinct healthcare segments, Cooper Companies (NASDAQ: COO) develops and manufactures medical devices focused on vision care through contact lenses and women's health including fertility products and services.

Why Are We Wary of COO?

1. Annual revenue growth of 7.3% over the last two years was below our standards for the healthcare sector
2. 8.3 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

At $67.50 per share, CooperCompanies trades at 15.5x forward P/E. To fully understand why you should be careful with COO, check out our full research report (it’s free).

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