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. That said, here are three cash-producing companies to avoid and some better opportunities instead.
Workday (WDAY)
Trailing 12-Month Free Cash Flow Margin: 29.1%
Born from the vision of PeopleSoft founders after Oracle's hostile takeover of their previous company, Workday (NASDAQ: WDAY) provides cloud-based software for financial management, human resources, planning, and analytics to help organizations manage their business operations.
Why Do We Think Twice About WDAY?
- Customers were hesitant to make long-term commitments to its software as its 12.5% average ARR growth over the last year was sluggish
- Estimated sales growth of 11.5% for the next 12 months implies demand will slow from its two-year trend
- Operating margin improvement of 2.6 percentage points over the last year demonstrates its ability to scale efficiently
Workday is trading at $125.81 per share, or 3x forward price-to-sales. Read our free research report to see why you should think twice about including WDAY in your portfolio.
Alight (ALIT)
Trailing 12-Month Free Cash Flow Margin: 11.1%
Born from a corporate spinoff in 2017 to focus on employee experience technology, Alight (NYSE: ALIT) provides human capital management solutions that help companies administer employee benefits, payroll, and workforce management systems.
Why Do We Avoid ALIT?
- Sales tumbled by 3.7% annually over the last five years, showing market trends are working against its favor during this cycle
- Performance over the past two years was negatively impacted by new share issuances as its earnings per share dropped by 16.1% annually, worse than its revenue
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $0.82 per share, Alight trades at 2.4x forward P/E. Check out our free in-depth research report to learn more about why ALIT doesn’t pass our bar.
Amentum (AMTM)
Trailing 12-Month Free Cash Flow Margin: 1.9%
With operations spanning approximately 80 countries and a workforce of specialized engineers and technical experts, Amentum Holdings (NYSE: AMTM) provides advanced engineering and technology solutions to U.S. government agencies, allied governments, and commercial enterprises across defense, energy, and space sectors.
Why Are We Cautious About AMTM?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 2.6% for the last two years
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- Performance over the past three years shows its incremental sales were much less profitable, as its earnings per share fell by 41.3% annually
Amentum’s stock price of $26.22 implies a valuation ratio of 10.3x forward P/E. To fully understand why you should be careful with AMTM, check out our full research report (it’s free).
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