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 avoid and some better opportunities instead.
FormFactor (FORM)
Trailing 12-Month Free Cash Flow Margin: 1.5%
With customers across the foundry and fabless markets, FormFactor (NASDAQ: FORM) is a US-based provider of test and measurement technologies for semiconductors.
Why Does FORM Give Us Pause?
- Sales trends were unexciting over the last five years as its 2.5% annual growth was below the typical semiconductor company
- Gross margin of 39.8% reflects its high production costs
- Low free cash flow margin of 5.9% declined over the last five years as its investments ramped, giving it little breathing room
At $150.00 per share, FormFactor trades at 78.9x forward P/E. Dive into our free research report to see why there are better opportunities than FORM.
The Honest Company (HNST)
Trailing 12-Month Free Cash Flow Margin: 3.7%
Co-founded by actress Jessica Alba, The Honest Company (NASDAQ: HNST) sells diapers and wipes, skin care products, and household cleaning products.
Why Is HNST Risky?
- Sales trends were unexciting over the last three years as its 5.8% annual growth was below the typical consumer staples company
- Subscale operations are evident in its revenue base of $371.3 million, meaning it has fewer distribution channels than its larger rivals
- Push for growth has led to negative returns on capital, signaling value destruction
The Honest Company is trading at $3.41 per share, or 37.8x forward P/E. To fully understand why you should be careful with HNST, check out our full research report (it’s free).
U.S. Physical Therapy (USPH)
Trailing 12-Month Free Cash Flow Margin: 7.8%
With a nationwide footprint spanning 671 clinics across 42 states, U.S. Physical Therapy (NYSE: USPH) operates a network of outpatient physical therapy clinics and provides industrial injury prevention services to employers across the United States.
Why Are We Cautious About USPH?
- Smaller revenue base of $781 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Incremental sales over the last five years were less profitable as its 1.9% annual earnings per share growth lagged its revenue gains
- Free cash flow margin dropped by 6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
U.S. Physical Therapy’s stock price of $74.84 implies a valuation ratio of 26.2x forward P/E. If you’re considering USPH for your portfolio, see our FREE research report to learn more.
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