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.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. That said, here are three cash-producing companies to steer clear of and a few better alternatives.
Agilysys (AGYS)
Trailing 12-Month Free Cash Flow Margin: 16.3%
Originally a subsidiary of Pioneer-Standard Electronics that distributed electronic components, Agilysys (NASDAQ: AGYS) offers a software-as-service platform that helps hotels, resorts, restaurants, and other hospitality businesses manage their operations and workflows.
Why Does AGYS Worry Us?
- Annual revenue growth of 19% over the last three years was below our standards for the software sector
- Gross margin of 62.1% reflects its relatively high servicing costs
At $104.35 per share, Agilysys trades at 9.1x forward price-to-sales. Dive into our free research report to see why there are better opportunities than AGYS.
Applied Industrial (AIT)
Trailing 12-Month Free Cash Flow Margin: 9.8%
Formerly called The Ohio Ball Bearing Company, Applied Industrial (NYSE: AIT) distributes industrial products–everything from power tools to industrial valves–and services to a wide variety of industries.
Why Are We Hesitant About AIT?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Anticipated sales growth of 4.9% for the next year implies demand will be shaky
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 29.4%
Applied Industrial’s stock price of $263.13 implies a valuation ratio of 24.6x forward P/E. Read our free research report to see why you should think twice about including AIT in your portfolio.
Integer Holdings (ITGR)
Trailing 12-Month Free Cash Flow Margin: 6.7%
With its name reflecting the mathematical term for "whole" or "complete," Integer Holdings (NYSE: ITGR) is a medical device outsource manufacturer that produces components and systems for cardiac, vascular, neurological, and other medical applications.
Why Is ITGR Not Exciting?
- Revenue base of $1.79 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Free cash flow margin shrank by 5.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Integer Holdings is trading at $106.45 per share, or 15.8x forward P/E. Check out our free in-depth research report to learn more about why ITGR doesn’t pass our bar.
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