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.

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.

Workday (WDAY)

Trailing 12-Month Free Cash Flow Margin: 29.1%

Born from the vision of PeopleSoft founders after Oracle's hostile takeover of their previous company, Workday (NASDAQ: WDAY) provides cloud-based software for financial management, human resources, planning, and analytics to help organizations manage their business operations.

Why Do We Think Twice About WDAY?

1. Customers were hesitant to make long-term commitments to its software as its 12.5% average ARR growth over the last year was sluggish
2. Estimated sales growth of 11.5% for the next 12 months implies demand will slow from its two-year trend
3. Operating margin improvement of 2.6 percentage points over the last year demonstrates its ability to scale efficiently

Workday is trading at $125.81 per share, or 3x forward price-to-sales. Read our free research report to see why you should think twice about including WDAY in your portfolio.

Alight (ALIT)

Trailing 12-Month Free Cash Flow Margin: 11.1%

Born from a corporate spinoff in 2017 to focus on employee experience technology, Alight (NYSE: ALIT) provides human capital management solutions that help companies administer employee benefits, payroll, and workforce management systems.

Why Do We Avoid ALIT?

1. Sales tumbled by 3.7% annually over the last five years, showing market trends are working against its favor during this cycle
2. Performance over the past two years was negatively impacted by new share issuances as its earnings per share dropped by 16.1% annually, worse than its revenue
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

At $0.82 per share, Alight trades at 2.4x forward P/E. Check out our free in-depth research report to learn more about why ALIT doesn’t pass our bar.

Amentum (AMTM)

Trailing 12-Month Free Cash Flow Margin: 1.9%

With operations spanning approximately 80 countries and a workforce of specialized engineers and technical experts, Amentum Holdings (NYSE: AMTM) provides advanced engineering and technology solutions to U.S. government agencies, allied governments, and commercial enterprises across defense, energy, and space sectors.

Why Are We Cautious About AMTM?

1. Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 2.6% for the last two years
2. Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
3. Performance over the past three years shows its incremental sales were much less profitable, as its earnings per share fell by 41.3% annually

Amentum’s stock price of $26.22 implies a valuation ratio of 10.3x forward P/E. To fully understand why you should be careful with AMTM, check out our full research report (it’s free).

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