Verizon Communications Inc. (VZ): Is Frontier Communications Corp (FTR) a Cash King?

The fact that much of Frontier Communications Corp (NASDAQ:FTR)’s existing business comes from rural landlines puts it in a difficult position, given the overall decline of consumer interest in those services. While the company has tried to lure customers into its higher-margin broadband services, it hasn’t had much success in doing so. Windstream, on the other hand, has managed to grow its revenues, and CenturyLink’s involvement in cloud computing offers promise of growth in high-margin areas that we aren’t seeing in Frontier Communications Corp (NASDAQ:FTR). Also, while Frontier Communications Corp (NASDAQ:FTR)’s acquisition of Verizon Communications Inc. (NYSE:VZ)’s landline business allowed Frontier Communications Corp (NASDAQ:FTR) to very quickly grow its size and revenue stream, the acquisition forced it to take on a great deal of debt, ultimately leading to a dividend cut. The sale also gave Verizon Communications Inc. (NYSE:VZ) more resources to grow its wireless network.

The cash king margin can help you find highly profitable businesses, but it should only be the start of your search. The ratio does have its limits, especially for fast-growing small businesses. Many such companies reinvest all of their cash flow into growing the business, leaving them little or no free cash — but that doesn’t necessarily make them poor investments. Conversely, the formula works better for slower-growing blue chips. You’ll need to look closer to determine exactly how a company is using its cash.

Still, if you can cut through the earnings headlines to follow the cash instead, you might be on the path toward seriously great investments.

The article Is Frontier Communications a Cash King? originally appeared on Fool.com and is written by James Royal.

Jim Royal has no position in any stocks mentioned. The Motley Fool recommends and owns shares of McDonald’s.

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