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. That said, here are three cash-producing companies to steer clear of and a few better alternatives.

The Cheesecake Factory (CAKE)

Trailing 12-Month Free Cash Flow Margin: 3.6%

Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ: CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.

Why Are We Cautious About CAKE?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
3. 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

The Cheesecake Factory’s stock price of $59.15 implies a valuation ratio of 15x forward P/E. Read our free research report to see why you should think twice about including CAKE in your portfolio.

CBRE (CBRE)

Trailing 12-Month Free Cash Flow Margin: 2.9%

Established in 1906, CBRE (NYSE: CBRE) is one of the largest commercial real estate services firms in the world.

Why Should You Sell CBRE?

1. Annual sales growth of 9.4% over the last five years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.6% for the last two years
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

CBRE is trading at $162.09 per share, or 25.2x forward P/E. Dive into our free research report to see why there are better opportunities than CBRE.

Ibotta (IBTA)

Trailing 12-Month Free Cash Flow Margin: 24.4%

Originally launched as a way to make grocery shopping more rewarding for budget-conscious consumers, Ibotta (NYSE: IBTA) is a mobile shopping app that allows consumers to earn cash back on everyday purchases by completing tasks and submitting receipts.

Why Are We Hesitant About IBTA?

1. Modest revenue base of $367.6 million gives it less fixed cost leverage and fewer distribution channels than larger companies
2. Forecasted revenue decline of 10.1% for the upcoming 12 months implies demand will fall off a cliff

At $27.51 per share, Ibotta trades at 7x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why IBTA doesn’t pass our bar.

Stocks We Like More

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