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. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.

Etsy (ETSY)

Trailing 12-Month Free Cash Flow Margin: 22.4%

Founded by a struggling amateur furniture maker Robert Kalin and his two friends, Etsy (NASDAQ: ETSY) is one of the world’s largest online marketplaces, focusing on handmade or vintage items.

Why Does ETSY Worry Us?

1. Likely needs to improve its platform or increase its marketing budget for penetration to accelerate as its active buyers were flat over the last two years
2. Sales are projected to remain flat over the next 12 months as demand decelerates from its three-year trend
3. Earnings per share were flat over the last three years while its revenue grew, showing its incremental sales were less profitable

Etsy is trading at $59.40 per share, or 9.8x forward EV/EBITDA. Check out our free in-depth research report to learn more about why ETSY doesn’t pass our bar.

Chegg (CHGG)

Trailing 12-Month Free Cash Flow Margin: 6.4%

Started as a physical textbook rental service, Chegg (NYSE: CHGG) is now a digital platform addressing student pain points by providing study and academic assistance.

Why Should You Dump CHGG?

1. Intense competition is diverting traffic from its platform as its services subscribers fell by 17.3% annually
2. EBITDA margin declined by 12.8 percentage points over the last few years as its sales cratered
3. Sales were less profitable over the last three years as its earnings per share fell by 38.2% annually, worse than its revenue declines

At $1.50 per share, Chegg trades at 2x forward EV/EBITDA. Dive into our free research report to see why there are better opportunities than CHGG.

CSX (CSX)

Trailing 12-Month Free Cash Flow Margin: 14.7%

Established as part of the Chessie System and Seaboard Coast Line Industries merger, CSX (NASDAQ: CSX) is a transportation company specializing in freight rail services.

Why Is CSX Risky?

1. Flat unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
2. Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 8.4% annually, worse than its revenue
3. 21.5 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

CSX’s stock price of $32.41 implies a valuation ratio of 18.1x forward P/E. If you’re considering CSX for your portfolio, see our FREE research report to learn more.

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