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.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
United Parks & Resorts (PRKS)
Trailing 12-Month Free Cash Flow Margin: 13.2%
Parent company of SeaWorld and home of the world-famous Shamu, United Parks & Resorts (NYSE:PRKS) is a theme park chain featuring marine life, live entertainment, roller coasters, and waterparks.
Why Do We Steer Clear of PRKS?
- Sluggish trends in its visitors suggest customers aren’t adopting its solutions as quickly as the company hoped
- Low free cash flow margin of 11.8% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
United Parks & Resorts’s stock price of $35.08 implies a valuation ratio of 9.2x forward P/E. If you’re considering PRKS for your portfolio, see our FREE research report to learn more.
W.W. Grainger (GWW)
Trailing 12-Month Free Cash Flow Margin: 6.9%
Founded as a supplier of motors, W.W. Grainger (NYSE:GWW) provides maintenance, repair, and operating (MRO) supplies and services to businesses and institutions.
Why Does GWW Fall Short?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Anticipated sales growth of 4.5% for the next year implies demand will be shaky
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 5.9% annually
At $1,021 per share, W.W. Grainger trades at 24.2x forward P/E. Check out our free in-depth research report to learn more about why GWW doesn’t pass our bar.
Encore Capital Group (ECPG)
Trailing 12-Month Free Cash Flow Margin: 8.5%
Operating in the often misunderstood world of debt collection since 1999, Encore Capital Group (NASDAQ:ECPG) purchases portfolios of defaulted consumer debt at deep discounts and works with individuals to recover these obligations while helping them toward financial recovery.
Why Are We Cautious About ECPG?
- Annual revenue growth of 1.3% over the last five years was below our standards for the financials sector
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 15.9% annually while its revenue grew
- High net-debt-to-EBITDA ratio of 11× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Encore Capital Group is trading at $54.37 per share, or 7.3x forward P/E. Read our free research report to see why you should think twice about including ECPG in your portfolio.
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