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. Keeping that in mind, here are three cash-producing companies that don’t make the cut and some better opportunities instead.

Allegro MicroSystems (ALGM)

Trailing 12-Month Free Cash Flow Margin: 7.4%

The result of a spinoff from Sanken in Japan, Allegro MicroSystems (NASDAQ: ALGM) is a designer of power management chips and distance sensors used in electric vehicles and data centers.

Why Does ALGM Fall Short?

1. Sales tumbled by 14.2% annually over the last two years, showing market trends are working against its favor during this cycle
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 15.6% annually
3. Weak free cash flow margin of 7.8% has deteriorated further over the last five years as its investments increased

At $33.90 per share, Allegro MicroSystems trades at 46.1x forward P/E. If you’re considering ALGM for your portfolio, see our FREE research report to learn more.

Gates Industrial Corporation (GTES)

Trailing 12-Month Free Cash Flow Margin: 8.4%

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 Are We Hesitant About GTES?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Anticipated sales growth of 3% for the next year implies demand will be shaky
3. Underwhelming 7% return on capital reflects management’s difficulties in finding profitable growth opportunities

Gates Industrial Corporation’s stock price of $23.85 implies a valuation ratio of 15.4x forward P/E. Check out our free in-depth research report to learn more about why GTES doesn’t pass our bar.

DaVita (DVA)

Trailing 12-Month Free Cash Flow Margin: 9.7%

With over 2,600 dialysis centers across the United States and a presence in 13 countries, DaVita (NYSE: DVA) operates a network of dialysis centers providing treatment and care for patients with chronic kidney disease and end-stage kidney disease.

Why Are We Cautious About DVA?

1. Sizable revenue base leads to growth challenges as its 2.9% annual revenue increases over the last five years fell short of other healthcare companies
2. Flat treatments over the past two years imply it may need to invest in improvements to get back on track
3. Estimated sales growth of 3.7% for the next 12 months implies demand will slow from its two-year trend

DaVita is trading at $109.17 per share, or 8.6x forward P/E. To fully understand why you should be careful with DVA, check out our full research report (it’s free).

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