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.
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 to avoid and some better opportunities instead.
Rush Street Interactive (RSI)
Trailing 12-Month Free Cash Flow Margin: 13.3%
Specializing in online casino gaming and sports betting, Rush Street Interactive (NYSE: RSI) is an operator of digital gaming platforms.
Why Are We Bearish on RSI?
- Sales trends were unexciting over the last five years as its 27.1% annual growth was below the typical consumer discretionary company
- Poor expense management has led to an operating margin of 8.2% that is below the industry average
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 12.2% for the last two years
Rush Street Interactive’s stock price of $25.24 implies a valuation ratio of 32.6x forward P/E. Read our free research report to see why you should think twice about including RSI in your portfolio.
Kroger (KR)
Trailing 12-Month Free Cash Flow Margin: 1.9%
With a sprawling network of over 2,400 locations offering digital pickup services, Kroger (NYSE: KR) operates supermarkets, pharmacies, and fuel centers across 35 states, offering customers groceries, household items, and private-label products.
Why Should You Sell KR?
- Lack of new stores puts a ceiling on its growth and reflects a focus on optimizing sales at existing locations
- Gross margin of 23.9% is below its competitors, leaving less money for marketing and promotions
- Earnings per share fell by 20.9% annually over the last three years while its revenue was flat, showing each sale was less profitable
At $56.65 per share, Kroger trades at 10.9x forward P/E. Check out our free in-depth research report to learn more about why KR doesn’t pass our bar.
NESR (NESR)
Trailing 12-Month Free Cash Flow Margin: 9.7%
Operating across 16 countries from Algeria to Indonesia, NESR (NASDAQ: NESR) provides oilfield services like hydraulic fracturing, cementing, and drilling to oil and gas companies.
Why Does NESR Give Us Pause?
- Revenue base of $1.62 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 12.8%
- Day-to-day expenses have swelled relative to revenue over the last five years as its EBITDA margin fell by 74.1 percentage points
NESR is trading at $36.56 per share, or 15.3x forward P/E. To fully understand why you should be careful with NESR, check out our full research report (it’s free).
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