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. That said, here are three cash-producing companies to avoid and some better opportunities instead.
RingCentral (RNG)
Trailing 12-Month Free Cash Flow Margin: 21.1%
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 Are We Out on RNG?
- Average billings growth of 3.8% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- 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
RingCentral’s stock price of $36.86 implies a valuation ratio of 1.3x forward price-to-sales. If you’re considering RNG for your portfolio, see our FREE research report to learn more.
CAVA (CAVA)
Trailing 12-Month Free Cash Flow Margin: 2.2%
Starting from a single Washington, D.C. location, CAVA (NYSE: CAVA) operates a fast-casual restaurant chain offering customizable Mediterranean-inspired dishes.
Why Are We Wary of CAVA?
- Operating margin of 4.6% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Earnings per share have contracted by 12.8% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Negative returns on capital show management lost money while trying to expand the business
At $86 per share, CAVA trades at 166x forward P/E. To fully understand why you should be careful with CAVA, check out our full research report (it’s free).
Borr Drilling (BORR)
Trailing 12-Month Free Cash Flow Margin: 12.5%
Operating one of the world's youngest jack-up fleets with an average age under eight years, Borr Drilling (NYSE: BORR) operates jack-up rigs that drill oil and gas wells in shallow waters up to 400 feet deep for exploration and production companies.
Why Do We Think Twice About BORR?
- Smaller revenue base of $1.02 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Cash burn makes us question whether it can achieve sustainable long-term growth
Borr Drilling is trading at $5.90 per share, or 7.9x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than BORR.
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