While strong cash flow is a key indicator of stability, it doesn’t always translate to superior returns. Some cash-heavy businesses struggle with inefficient spending, slowing demand, or weak competitive positioning.
Luckily for you, we built StockStory to help you separate the good from the bad. That said, here are three cash-producing companies to steer clear of and a few better alternatives.
PlayStudios (MYPS)
Trailing 12-Month Free Cash Flow Margin: 16%
Founded by a team of former gaming industry executives, PlayStudios (NASDAQ: MYPS) offers free-to-play digital casino games.
Why Do We Avoid MYPS?
- Number of daily active users has disappointed over the past two years, indicating weak demand for its offerings
- Historical operating margin losses point to an inefficient cost structure
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
PlayStudios is trading at $1.02 per share, or 2.6x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including MYPS in your portfolio.
Bath and Body Works (BBWI)
Trailing 12-Month Free Cash Flow Margin: 10.6%
Spun off from L Brands in 2020, Bath & Body Works (NYSE: BBWI) is a personal care and home fragrance retailer where consumers can find specialty shower gels, scented candles for the home, and lotions.
Why Are We Wary of BBWI?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Estimated sales growth of 2.6% for the next 12 months implies demand will slow from its six-year trend
- Earnings growth over the last six years fell short of the peer group average as its EPS only increased by 8.5% annually
At $26.03 per share, Bath and Body Works trades at 7.2x forward P/E. To fully understand why you should be careful with BBWI, check out our full research report (it’s free).
Crocs (CROX)
Trailing 12-Month Free Cash Flow Margin: 18.6%
Founded in 2002, Crocs (NASDAQ: CROX) sells casual footwear and is known for its iconic clog shoe.
Why Does CROX Fall Short?
- Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
- Sales are projected to tank by 4.3% over the next 12 months as demand evaporates
- Waning returns on capital imply its previous profit engines are losing steam
Crocs’s stock price of $77.15 implies a valuation ratio of 6x forward P/E. Check out our free in-depth research report to learn more about why CROX doesn’t pass our bar.
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