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 to steer clear of and a few better alternatives.

RingCentral (RNG)

Trailing 12-Month Free Cash Flow Margin: 20%

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 Do We Avoid RNG?

1. Offerings struggled to generate meaningful interest as its average billings growth of 5% over the last year did not impress
2. Estimated sales growth of 5% for the next 12 months implies demand will slow from its three-year trend
3. Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low

RingCentral’s stock price of $28.98 implies a valuation ratio of 1x forward price-to-sales. If you’re considering RNG for your portfolio, see our FREE research report to learn more.

Hershey (HSY)

Trailing 12-Month Free Cash Flow Margin: 14.6%

Best known for its milk chocolate bar and Hershey's Kisses, Hershey (NYSE: HSY) is an iconic company known for its chocolate products.

Why Are We Hesitant About HSY?

1. Falling unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
2. Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 4.4 percentage points
3. Earnings per share were flat over the last three years and fell short of the peer group average

Hershey is trading at $180.04 per share, or 31.7x forward P/E. Check out our free in-depth research report to learn more about why HSY doesn’t pass our bar.

Illumina (ILMN)

Trailing 12-Month Free Cash Flow Margin: 24.1%

Pioneering the ability to read the human genome at unprecedented speed and affordability, Illumina (NASDAQ: ILMN) develops and sells advanced DNA sequencing and microarray technologies that allow researchers and clinicians to analyze genetic variations and functions.

Why Are We Out on ILMN?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 6.3% annually
3. Low returns on capital reflect management’s struggle to allocate funds effectively

At $100 per share, Illumina trades at 22.3x forward P/E. If you’re considering ILMN for your portfolio, see our FREE research report to learn more.

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