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 steer clear of and a few better alternatives.
H&R Block (HRB)
Trailing 12-Month Free Cash Flow Margin: 13.8%
Founded in 1955 by brothers Henry W. Bloch and Richard A. Bloch, H&R Block (NYSE: HRB) is a tax preparation company offering professional tax assistance and financial solutions to individuals and small businesses.
Why Do We Steer Clear of HRB?
- Muted 5.6% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Eroding returns on capital suggest its historical profit centers are aging
At $31.63 per share, H&R Block trades at 1x forward price-to-sales. Dive into our free research report to see why there are better opportunities than HRB.
Exact Sciences (EXAS)
Trailing 12-Month Free Cash Flow Margin: 11%
With a mission to detect cancer earlier when it's more treatable, Exact Sciences (NASDAQ: EXAS) develops and markets cancer screening and diagnostic tests, including its flagship Cologuard stool-based colorectal cancer screening test.
Why Does EXAS Worry Us?
- Cash-burning history makes us doubt the long-term viability of its business model
- Negative returns on capital show that some of its growth strategies have backfired
Exact Sciences is trading at $103.47 per share, or 90.8x forward P/E. Check out our free in-depth research report to learn more about why EXAS doesn’t pass our bar.
Penumbra (PEN)
Trailing 12-Month Free Cash Flow Margin: 12.5%
Founded in 2004 to address challenging medical conditions with significant unmet needs, Penumbra (NYSE: PEN) develops and manufactures innovative medical devices for treating vascular diseases and providing immersive healthcare rehabilitation solutions.
Why Does PEN Give Us Pause?
- Smaller revenue base of $1.40 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Penumbra’s stock price of $340.96 implies a valuation ratio of 67.2x forward P/E. To fully understand why you should be careful with PEN, check out our full research report (it’s free).
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