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.

Luckily for you, we built StockStory to help you separate the good from the bad. That said, here are three cash-producing companies to steer clear of and a few better alternatives.

LiveRamp (RAMP)

Trailing 12-Month Free Cash Flow Margin: 20.4%

Started in 2011 as a spin-out of RapLeaf, LiveRamp (NYSE: RAMP) is a software-as-a-service provider that helps companies better target their marketing by merging offline and online data about their customers.

Why Do We Think Twice About RAMP?

1. 12.1% annual revenue growth over the last three years was slower than its software peers
2. Estimated sales growth of 8.4% for the next 12 months implies demand will slow from its three-year trend
3. Projected 4.4 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position

LiveRamp is trading at $32.60 per share, or 2.7x forward price-to-sales. Dive into our free research report to see why there are better opportunities than RAMP.

Universal Display (OLED)

Trailing 12-Month Free Cash Flow Margin: 25.2%

Serving major consumer electronics manufacturers, Universal Display (NASDAQ: OLED) is a provider of organic light emitting diode (OLED) technologies used in display and lighting applications.

Why Are We Wary of OLED?

1. Annual revenue growth of 4.3% over the last two years was below our standards for the semiconductor sector
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 4.1%
3. 5.7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

Universal Display’s stock price of $149.60 implies a valuation ratio of 32.3x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including OLED in your portfolio.

MRC Global (MRC)

Trailing 12-Month Free Cash Flow Margin: 7.4%

Producing bomb casings and tracks for vehicles during WWII, MRC (NYSE: MRC) offers pipes, valves, and fitting products for various industries.

Why Do We Pass on MRC?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 2.9% annually over the last five years
2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
3. Low returns on capital reflect management’s struggle to allocate funds effectively

At $14.61 per share, MRC Global trades at 12.4x forward P/E. Check out our free in-depth research report to learn more about why MRC doesn’t pass our bar.

Stocks We Like More

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