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 steer clear of and a few better alternatives.
RingCentral (RNG)
Trailing 12-Month Free Cash Flow Margin: 20.8%
Built on its proprietary Message Video Phone (MVP) platform that unifies multiple communication methods, RingCentral (NYSE:RNG) provides AI-driven cloud communications and collaboration solutions that enable businesses to connect through voice, video, messaging, and contact center services.
Why Do We Think RNG Will Underperform?
- Offerings struggled to generate meaningful interest as its average billings growth of 4.2% over the last year did not impress
- Estimated sales growth of 4.5% for the next 12 months implies demand will slow from its two-year trend
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
At $28.28 per share, RingCentral trades at 1x forward price-to-sales. To fully understand why you should be careful with RNG, check out our full research report (it’s free for active Edge members).
Paycom (PAYC)
Trailing 12-Month Free Cash Flow Margin: 19.7%
Pioneering the concept of employees doing their own payroll with its "Beti" technology, Paycom (NYSE:PAYC) provides cloud-based human capital management software that helps businesses manage the entire employment lifecycle from recruitment to retirement.
Why Are We Cautious About PAYC?
- Offerings struggled to generate meaningful interest as its average billings growth of 9.5% over the last year did not impress
- Anticipated sales growth of 9.5% for the next year implies demand will be shaky
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 4.6 percentage points
Paycom’s stock price of $163.98 implies a valuation ratio of 4.1x forward price-to-sales. Check out our free in-depth research report to learn more about why PAYC doesn’t pass our bar.
Essent Group (ESNT)
Trailing 12-Month Free Cash Flow Margin: 67.6%
Serving as a crucial bridge between homebuyers and the American dream of homeownership, Essent Group (NYSE:ESNT) provides private mortgage insurance and title services that enable lenders to offer home loans with down payments of less than 20%.
Why Does ESNT Give Us Pause?
- Growth in insurance policies was lackluster over the last five years as its 3.1% annual growth underperformed the typical financial institution
- Efficiency has decreased over the last two years as its pre-tax profit margin fell by 10.2 percentage points
- Incremental sales over the last two years were less profitable as its 5% annual earnings per share growth lagged its revenue gains
Essent Group is trading at $63.40 per share, or 1x forward P/B. Dive into our free research report to see why there are better opportunities than ESNT.
High-Quality Stocks for All Market Conditions
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