In an economy where the consumer wants to save every dollar you may want to look toward dollar store chains Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR). However, it always pays to do research to determine whether or not companies grow their revenue and free cash flow in order to retain some cash for further reinvestment in their business. Cash flow represents the life blood of any business and serves as the key to future capital gains and increases in dividends. Let's see how these chains measure up.

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The "largest discount retailer"
Dollar General represents the "largest discount retailer in the United States" with 11,215 stores as of the end of fiscal year 2013. This gives Dollar General considerable economies of scale allowing it to profitably sell goods at competitive prices. Dollar General had a good year with revenue, net income, and free cash flow growing 9%, 8%, and 72%  respectively for the year.

Dollar General's same store sales grew 3.3% meaning that it can keep its customers coming back.  Moreover, lower interest expense  stemming from slightly lower debt  and debt refinancing  contributed to the gains in net income. Lower capital expenditures and the sale of plant, property, and equipment contributed to the free cash flow gains.  On Dollar General's balance sheet cash and long-term debt to equity clocked in at 9% and 51% respectively at the end of fiscal year 2013.Dollar General currently pays no dividend.

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Does money grow on trees?
Dollar Tree operated 4,992 stores as of the end of fiscal year 2013 making it less than half the size of Dollar General. However, this company still stands out based on its approach of selling all of its merchandise at the $1 price point. In fiscal year 2013, Dollar Tree grew its revenue 6% and in spite of a 4% decline in net income, managed to grow free cash flow  27%.

Dollar Tree's comparable store sales increased 2.4% during that time which contributed to revenue growth.  Increases in interest expense contributed to net income decline.  Decreases in outlays for prepaid rent and inventory purchases contributed to free cash flow increases.  Looking at Dollar Tree's balance sheet, cash and long-term debt to equity clocked in at 23% and 65%  of stockholder's equity respectively at the end of fiscal year 2013. It's preferable to find a company with a long-term debt to equity ratio less than 50%. Companies with an appetite for debt will find profitability and cash flow choked out by interest. Dollar Tree currently pays no dividend.

Which is the best investment?
Both Dollar General and Dollar Tree have their merits. However, Dollar Tree represents your best bet as it sports the highest profit margin of the two companies listed coming in at 8% versus 6%for Dollar General. Dollar Tree also possesses room to expand with its smaller store base. However, keep an eye on its expanding long-term debt which could result in increasing interest expense. The runner up, Dollar General, possesses purchasing advantages due to its huge store base. 


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.