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. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Marqeta (MQ)
Trailing 12-Month Free Cash Flow Margin: 19.2%
Powering the cards behind innovative fintech services like Block's Cash App, Marqeta (NASDAQ: MQ) provides a cloud-based platform that allows businesses to create customized payment card programs and process card transactions.
Why Are We Hesitant About MQ?
- Annual revenue growth of 6.3% over the last two years was well below our standards for the software sector
- Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 5.3 percentage points
At $3.84 per share, Marqeta trades at 2.3x forward price-to-sales. If you’re considering MQ for your portfolio, see our FREE research report to learn more.
Levi's (LEVI)
Trailing 12-Month Free Cash Flow Margin: 7.3%
Credited for inventing the first pair of blue jeans in 1873, Levi's (NYSE: LEVI) is an apparel company renowned for its iconic denim products and classic American style.
Why Is LEVI Risky?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Free cash flow margin is forecasted to shrink by 4.9 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Levi's is trading at $23.11 per share, or 14.9x forward P/E. Read our free research report to see why you should think twice about including LEVI in your portfolio.
Quanex (NX)
Trailing 12-Month Free Cash Flow Margin: 5.1%
Starting in the seamless tube industry, Quanex (NYSE: NX) manufactures building products like window, door, kitchen, and bath cabinet components.
Why Do We Think Twice About NX?
- Efficiency has decreased over the last five years as its operating margin fell by 17.6 percentage points
- Issuance of new shares over the last two years caused its earnings per share to fall by 12.6% annually while its revenue grew
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Quanex’s stock price of $18.92 implies a valuation ratio of 11.3x forward P/E. Dive into our free research report to see why there are better opportunities than NX.
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