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.
Luckily for you, we built StockStory to help you separate the good from the bad. That said, here are three cash-producing companies to avoid and some better opportunities instead.
Manhattan Associates (MANH)
Trailing 12-Month Free Cash Flow Margin: 34.5%
Built on a "versionless" cloud architecture that delivers quarterly updates to all customers, Manhattan Associates (NASDAQ: MANH) develops cloud-based software that helps retailers, wholesalers, and manufacturers manage their supply chains, inventory, and omnichannel operations.
Why Are We Cautious About MANH?
- Offerings struggled to generate meaningful interest as its average billings growth of 5.8% over the last year did not impress
- Gross margin of 56% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Operating margin failed to increase over the last year, indicating the company couldn’t optimize its expenses
Manhattan Associates is trading at $153.85 per share, or 7.7x forward price-to-sales. Dive into our free research report to see why there are better opportunities than MANH.
Genesis Energy (GEL)
Trailing 12-Month Free Cash Flow Margin: 10.6%
Operating a 64% stake in the Poseidon Pipeline, one of the Gulf of Mexico's largest crude oil pipelines, Genesis Energy (NYSE: GEL) provides midstream services like pipeline transportation, storage, and processing for crude oil and natural gas producers and refiners.
Why Is GEL Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.5% annually over the last five years
- Gross margin of 25.3% is below its competitors, leaving less money to invest in exploration and production
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Genesis Energy’s stock price of $14.25 implies a valuation ratio of 8.2x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including GEL in your portfolio.
Paramount (PSKY)
Trailing 12-Month Free Cash Flow Margin: 1.1%
Owner of Spongebob Squarepants and formerly known as ViacomCBS, Paramount Global (NASDAQ: PSKY) is a major media conglomerate offering television, film production, and digital content across various global platforms.
Why Do We Steer Clear of PSKY?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 2.1% over the last five years was below our standards for the consumer discretionary sector
- Projected 2.3 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $10.09 per share, Paramount trades at 13.6x forward P/E. To fully understand why you should be careful with PSKY, check out our full research report (it’s free).
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