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. Keeping that in mind, here are three cash-producing companies that don’t make the cut and some better opportunities instead.

Elastic (ESTC)

Trailing 12-Month Free Cash Flow Margin: 17.7%

Started by Shay Banon as a search engine for his wife's growing list of recipes at Le Cordon Bleu cooking school in Paris, Elastic (NYSE: ESTC) helps companies integrate search into their products and monitor their cloud infrastructure.

Why Does ESTC Fall Short?

1. Annual revenue growth of 19.8% over the last three years was below our standards for the software sector
2. Suboptimal cost structure is highlighted by its history of operating margin losses
3. Projected 1.7 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position

Elastic’s stock price of $84.27 implies a valuation ratio of 5.3x forward price-to-sales. Read our free research report to see why you should think twice about including ESTC in your portfolio.

Disney (DIS)

Trailing 12-Month Free Cash Flow Margin: 11.6%

Founded by brothers Walt and Roy, Disney (NYSE: DIS) is a multinational entertainment conglomerate, renowned for its theme parks, movies, television networks, and merchandise.

Why Do We Pass on DIS?

1. Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 3.7% for the last five years
2. Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 5.3 percentage points
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Disney is trading at $120 per share, or 21.7x forward P/E. Check out our free in-depth research report to learn more about why DIS doesn’t pass our bar.

Warner Bros. Discovery (WBD)

Trailing 12-Month Free Cash Flow Margin: 11.3%

Formed from the merger of WarnerMedia and Discovery, Warner Bros. Discovery (NASDAQ: WBD) is a multinational media and entertainment company, offering television networks, streaming services, and film and television production.

Why Should You Sell WBD?

1. Products and services aren't resonating with the market as its revenue declined by 4.9% annually over the last two years
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 38.3% annually
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $11.75 per share, Warner Bros. Discovery trades at 213.3x forward P/E. If you’re considering WBD for your portfolio, see our FREE research report to learn more.

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