A cash-heavy balance sheet is often a sign of strength, but not always. Some companies avoid debt because they have weak business models, limited expansion opportunities, or inconsistent cash flow.
Just because a business has cash doesn’t mean it’s a good investment. Luckily, StockStory is here to help you separate the winners from the losers. That said, here are three companies with net cash positions that don’t make the cut and some better choices instead.
Sonos (SONO)
Net cash position: $204.2 million (10.3% of Market Cap)
A pioneer in connected home audio systems, Sonos (NASDAQ: SONO) offers a range of premium wireless speakers and sound systems.
Why Do We Steer Clear of SONO?
- Annual revenue declines of 2.6% over the last five years indicate problems with its market positioning
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 11.5% annually, worse than its revenue
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 6.3% for the last two years
Sonos’s stock price of $16.63 implies a valuation ratio of 17.5x forward P/E. If you’re considering SONO for your portfolio, see our FREE research report to learn more.
Insteel (IIIN)
Net cash position: $35.88 million (6.4% of Market Cap)
Growing from a small wire manufacturer to one of the largest in the U.S., Insteel (NYSE: IIIN) provides steel wire reinforcing products for concrete.
Why Are We Wary of IIIN?
- 4.6% annual revenue growth over the last five years was slower than its industrials peers
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
- Eroding returns on capital suggest its historical profit centers are aging
At $27.36 per share, Insteel trades at 15.3x forward P/E. Check out our free in-depth research report to learn more about why IIIN doesn’t pass our bar.
Berkshire Hathaway (BRK.A)
Net cash position: $223 billion (18% of Market Cap)
Led by legendary investor Warren Buffett since 1965, transforming it from a struggling textile manufacturer into a corporate giant, Berkshire Hathaway (NYSE: BRK.A) is a diversified holding company that owns businesses across insurance, railroads, utilities, manufacturing, retail, and services sectors.
Why Does BRK.A Fall Short?
- 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 4.2% for the last five years
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 7% annually
Berkshire Hathaway is trading at $869,626 per share, or 25.2x forward P/E. To fully understand why you should be careful with BRK.A, check out our full research report (it’s free).
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