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.

Carriage Services (CSV)

Trailing 12-Month Free Cash Flow Margin: 12.1%

Established in 1991, Carriage Services (NYSE: CSV) is a provider of funeral and cemetery services in the United States.

Why Do We Think Twice About CSV?

1. Muted 4.3% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
2. Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
3. Low returns on capital reflect management’s struggle to allocate funds effectively, and its shrinking returns suggest its past profit sources are losing steam

Carriage Services is trading at $43.30 per share, or 10.3x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including CSV in your portfolio.

Avantor (AVTR)

Trailing 12-Month Free Cash Flow Margin: 8.3%

With roots dating back to 1904 and embedded in virtually every stage of scientific research and production, Avantor (NYSE: AVTR) provides mission-critical products, materials, and services to customers in biopharma, healthcare, education, and advanced technology industries.

Why Does AVTR Fall Short?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Projected sales for the next 12 months are flat and suggest demand will be subdued
3. Free cash flow margin dropped by 4.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Avantor’s stock price of $13.19 implies a valuation ratio of 12.3x forward P/E. Check out our free in-depth research report to learn more about why AVTR doesn’t pass our bar.

Essent Group (ESNT)

Trailing 12-Month Free Cash Flow Margin: 68.4%

Serving as a crucial bridge between homebuyers and the American dream of homeownership, Essent Group (NYSE: ESNT) provides private mortgage insurance and title services that enable lenders to offer home loans with down payments of less than 20%.

Why Are We Wary of ESNT?

1. 3.6% annualized net premiums earned growth over the last five years lagged behind its insurance peers
2. Day-to-day expenses have swelled relative to revenue over the last two years as its pre-tax profit margin fell by 12.5 percentage points
3. Annual earnings per share growth of 4.9% underperformed its revenue over the last two years, showing its incremental sales were less profitable

At $63.80 per share, Essent Group trades at 1.1x forward P/B. To fully understand why you should be careful with ESNT, check out our full research report (it’s free).

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