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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.

Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. Keeping that in mind, here are three cash-producing companies to steer clear of and a few better alternatives.

Shyft (SHYF)

Trailing 12-Month Free Cash Flow Margin: 2.1%

Notably receiving an order from FedEx for electric vehicles, Shyft (NASDAQ:SHYF) offers specialty vehicles and truck bodies for various industries.

Why Is SHYF Risky?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 13.7% annually over the last two years

2. Free cash flow margin shrank by 6.8 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

3. Diminishing returns on capital suggest its earlier profit pools are drying up

Shyft is trading at $8.74 per share, or 8.1x forward P/E. If you’re considering SHYF for your portfolio, see our FREE research report to learn more.

Surgery Partners (SGRY)

Trailing 12-Month Free Cash Flow Margin: 6.7%

With more than 180 locations across 33 states serving as alternatives to traditional hospital settings, Surgery Partners (NASDAQ:SGRY) operates a national network of outpatient surgical facilities including ambulatory surgery centers and short-stay surgical hospitals.

Why Are We Cautious About SGRY?

1. Disappointing unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy

2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 4.2 percentage points

3. 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

At $22.43 per share, Surgery Partners trades at 21.6x forward P/E. Check out our free in-depth research report to learn more about why SGRY doesn’t pass our bar.

SAIC (SAIC)

Trailing 12-Month Free Cash Flow Margin: 6.8%

With over five decades of experience supporting national security missions, Science Applications International Corporation (NASDAQ:SAIC) provides technical, engineering, and enterprise IT services primarily to U.S. government agencies and military branches.

Why Do We Think SAIC Will Underperform?

1. Annual sales declines of 1.5% for the past two years show its products and services struggled to connect with the market during this cycle

2. Estimated sales growth of 2.7% for the next 12 months is soft and implies weaker demand

3. Below-average returns on capital indicate management struggled to find compelling investment opportunities