A cash-heavy balance sheet is often a sign of strength, but not always. Some companies avoid debt because they have weak business models, limited expansion opportunities, or inconsistent cash flow.
Financial flexibility is valuable, but it’s not everything - at StockStory, we help you find the stocks that can not only survive but also outperform. Keeping that in mind, here are three companies with net cash positions to avoid and some better alternatives instead.
F5 (FFIV)
Net Cash Position: $1.02 billion (5.9% of Market Cap)
Initially started as a hardware appliances company in the late 1990s, F5 (NASDAQ:FFIV) makes software that helps large enterprises ensure their web applications are always available by distributing network traffic and protecting them from cyberattacks.
Why Are We Wary of FFIV?
- Annual revenue growth of 3.5% over the last three years was well below our standards for the software sector
- ARR has dropped by 8.3% over the last year, suggesting it lost long-term deals and renewals
- Estimated sales growth of 4% for the next 12 months is soft and implies weaker demand
F5 is trading at $300 per share, or 5.8x forward price-to-sales. Check out our free in-depth research report to learn more about why FFIV doesn’t pass our bar.
Grid Dynamics (GDYN)
Net Cash Position: $314 million (35% of Market Cap)
With engineering centers across the Americas, Europe, and India serving Fortune 1000 companies, Grid Dynamics (NASDAQ:GDYN) provides technology consulting, engineering, and analytics services to help large enterprises modernize their technology systems and business processes.
Why Does GDYN Fall Short?
- Modest revenue base of $371.2 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 8.5% annually while its revenue grew
- Push for growth has led to negative returns on capital, signaling value destruction
Grid Dynamics’s stock price of $10.80 implies a valuation ratio of 26.9x forward P/E. Dive into our free research report to see why there are better opportunities than GDYN.
ScanSource (SCSC)
Net Cash Position: $4.34 million (0.5% of Market Cap)
Operating as a crucial link in the technology supply chain since 1992, ScanSource (NASDAQ:SCSC) is a hybrid distributor that connects hardware, software, and cloud services from technology suppliers to resellers and business customers.
Why Is SCSC Risky?
- Sales tumbled by 1.5% annually over the last five years, showing market trends are working against its favor during this cycle
- Earnings per share have contracted by 8.5% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $40.41 per share, ScanSource trades at 10.9x forward P/E. Read our free research report to see why you should think twice about including SCSC in your portfolio.
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