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.
Not all companies are created equal, and StockStory is here to surface the ones with real upside. That said, here are three cash-producing companies to avoid and some better opportunities instead.
Solventum (SOLV)
Trailing 12-Month Free Cash Flow Margin: 9.8%
Founded in 1985, Solventum (NYSE:SOLV) develops, manufactures, and commercializes a portfolio of healthcare products and services addressing critical customer and therapeutic patient needs.
Why Does SOLV Fall Short?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Sales are projected to be flat over the next 12 months and imply weak demand
- Earnings per share fell by 18.2% annually over the last two years while its revenue was flat, showing each sale was less profitable
At $66.07 per share, Solventum trades at 12.1x forward price-to-earnings. If you’re considering SOLV for your portfolio, see our FREE research report to learn more.
Lockheed Martin (LMT)
Trailing 12-Month Free Cash Flow Margin: 6.9%
Headquartered in Maryland, Famous for the F-35 aircraft, Lockheed Martin (NYSE:LMT) specializes in defense, space, homeland security, and information technology products.
Why Do We Steer Clear of LMT?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 3.3% over the last five years was below our standards for the industrials sector
- Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
- Waning returns on capital imply its previous profit engines are losing steam
Lockheed Martin is trading at $478.40 per share, or 17x forward price-to-earnings. Read our free research report to see why you should think twice about including LMT in your portfolio.
Designer Brands (DBI)
Trailing 12-Month Free Cash Flow Margin: 1%
Founded in 1969 as a shoe importer and distributor, Designer Brands (NYSE:DBI) is an American discount retailer focused on footwear and accessories.
Why Are We Out on DBI?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
- High net-debt-to-EBITDA ratio of 9× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Designer Brands’s stock price of $2.76 implies a valuation ratio of 5.4x forward price-to-earnings. Check out our free in-depth research report to learn more about why DBI doesn’t pass our bar.
Stocks We Like More
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Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.