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.
Luckily for you, we built StockStory to help you separate the good from the bad. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Trailing 12-Month Free Cash Flow Margin: 38.6%
Once the verb that defined remote work during the pandemic ("let's Zoom later"), Zoom (NASDAQ:ZM) provides a cloud-based platform for video meetings, phone calls, team chat, and collaboration tools that helps businesses and individuals connect virtually.
Underwhelming ARR growth of 5% over the last year suggests the company faced challenges in acquiring and retaining long-term customers
Net revenue retention rate of 98.5% shows it has a tough time retaining customers
Anticipated sales growth of 3.9% for the next year implies demand will be shaky
Zoom is trading at $96.63 per share, or 5.9x forward price-to-sales. Read our free research report to see why you should think twice about including ZM in your portfolio, it's free.
Trailing 12-Month Free Cash Flow Margin: 19%
Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ:CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.
Sales trends were unexciting over the last five years as its 15.5% annual growth was below the typical consumer discretionary company
Below-average returns on capital indicate management struggled to find compelling investment opportunities
Rising returns on capital show management is making relatively better investments
At $85.89 per share, Churchill Downs trades at 12.2x forward P/E. Check out our free in-depth research report to learn more about why CHDN doesn't pass our bar.
Trailing 12-Month Free Cash Flow Margin: 16.8%
Credited with the invention of the glass-lined water heater, A.O. Smith (NYSE:AOS) manufactures water heating and treatment products for various industries.
Annual sales declines of 1.6% for the past two years show its products and services struggled to connect with the market during this cycle
Earnings per share have dipped by 2.7% annually over the past two years, which is concerning because stock prices follow EPS over the long term
Waning returns on capital imply its previous profit engines are losing steam
A. O. Smith's stock price of $60.00 implies a valuation ratio of 15.5x forward P/E. Dive into our free research report to see why there are better opportunities than AOS.
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+271% between June 2020 and June 2025). Find your next big winner with StockStory today.