A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.

Not all companies are created equal, and StockStory is here to surface the ones with real upside. That said, here are three cash-producing companies that don’t make the cut and some better opportunities instead.

Somnigroup (SGI)

Trailing 12-Month Free Cash Flow Margin: 10.3%

Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE: SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products

Why Are We Hesitant About SGI?

1. 4.6% annual revenue growth over the last two years was slower than its consumer discretionary peers
2. Diminishing returns on capital suggest its earlier profit pools are drying up
3. High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens

At $71.87 per share, Somnigroup trades at 25x forward P/E. Dive into our free research report to see why there are better opportunities than SGI.

Novanta (NOVT)

Trailing 12-Month Free Cash Flow Margin: 15%

Originally a pioneer in the laser scanning industry during the late 1960s, Novanta (NASDAQ: NOVT) offers medicine and manufacturing technology to the medical, life sciences, and manufacturing industries.

Why Does NOVT Give Us Pause?

1. Sales trends were unexciting over the last two years as its 4.2% annual growth was below the typical industrials company
2. Flat earnings per share over the last two years underperformed the sector average
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7.5 percentage points

Novanta’s stock price of $129.33 implies a valuation ratio of 26.5x forward EV-to-EBITDA. If you’re considering NOVT for your portfolio, see our FREE research report to learn more.

Gates Industrial Corporation (GTES)

Trailing 12-Month Free Cash Flow Margin: 9.5%

Helping create one of the most memorable moments for the iconic “Jurassic Park” film, Gates (NYSE: GTES) offers power transmission and fluid transfer equipment for various industries.

Why Is GTES Not Exciting?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Projected sales growth of 1.1% for the next 12 months suggests sluggish demand
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Gates Industrial Corporation is trading at $24.01 per share, or 16.5x forward P/E. Check out our free in-depth research report to learn more about why GTES doesn’t pass our bar.

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