Is the company's cash its own? Dig Deeper. - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Is the company's cash its own? Dig Deeper.

Jul 4, 2012

Cash rich companies are very popular with investors for more than one reason. A firm that has a healthy cash balance can utilize it productively for capacity expansion, acquisitions or rewarding investors. These cash rich companies are also in a stronger position to tide over a business slowdown.

However, making the right decisions on how to use the excess cash is not easy. For example, should one reward investors via paying out dividends or share repurchase?

What is important is that the cash visible on the books of the company may not all be "free cash". That is, some of the cash shown in the company's books may actually not be at its disposal for the purposes indicated above.

Funds are often kept with a bank as a margin or collateral deposit. Then, this cash used as margin or collateral is essentially "locked" and cannot be considered as free cash. And that cash is no longer available for capital expenditure, acquisitions or rewarding investors.

For example, a jewellery exporter Shree Ganesh Jewellery House shows huge cash reserves of Rs.6.4 bn on its balance sheet. This implies a cash per share of Rs 106 (Current Market Price= Rs 112) in 2011. This may make the company seem like a very attractive investment. However, a closer look at the composition of this cash amount reveals that most of it (Rs 6.1 bn) is deposited as margin money with banks. The margin money is the amount that Shree Ganesh parks as deposits with banks against gold that it procures from or through them, and so this amount is not available for other purposes.

While analyzing the company's financials, investors may mistakenly consider the total cash shown in the reports as free cash. But as we demonstrated above, this is not true if any of the cash is tied up as margin or collateral.

Investor beware - what is free and real cash ... and not?

How do we know what is the free cash of this company?

Interestingly the company's annual report clearly states that this Rs. 6.1bn "margin" money cannot be used for other purposes such as repayment of debt, expansion or mergers and acquisitions.

So , as an investor, just looking at the Profit and Loss (P&L) and Balance Sheet (BS) does not represent the true picture of a company's financial situation. We need to delve deeper into the line items, and carefully read the finer details of the annual report (notes to accounts, auditor's notes etc.), and analyse this content along with the management guidance before arriving at our investment decision.

This careful and studied approach will help us in unearthing the real free cash to determine if the company is truly cash rich so that it can invest to grow. And this will tell us if it is a potential stock to consider from a long term investment perspective.


Equitymaster requests your view! Post a comment on "Is the company's cash its own? Dig Deeper.". Click here!

  

More Views on News

TRENT LTD Announces Quarterly Results (2QFY20); Net Profit Up 16.3% (Quarterly Result Update)

Nov 14, 2019 | Updated on Nov 14, 2019

For the quarter ended September 2019, TRENT LTD has posted a net profit of Rs 383 m (up 16.3% YoY). Sales on the other hand came in at Rs 8 bn (up 32.8% YoY). Read on for a complete analysis of TRENT LTD's quarterly results.

TITAN Announces Quarterly Results (2QFY20); Net Profit Up 3.8% (Quarterly Result Update)

Nov 7, 2019 | Updated on Nov 7, 2019

For the quarter ended September 2019, TITAN has posted a net profit of Rs 3 bn (up 3.8% YoY). Sales on the other hand came in at Rs 47 bn (up 2.1% YoY). Read on for a complete analysis of TITAN's quarterly results.

PC JEWELLER 2018-19 Annual Report Analysis (Annual Result Update)

Oct 18, 2019 | Updated on Oct 18, 2019

Here's an analysis of the annual report of PC JEWELLER for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of PC JEWELLER. Also includes updates on the valuation of PC JEWELLER.

TRENT LTD 2018-19 Annual Report Analysis (Annual Result Update)

Jul 4, 2019 | Updated on Jul 4, 2019

Here's an analysis of the annual report of TRENT LTD for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of TRENT LTD. Also includes updates on the valuation of TRENT LTD.

TCNS Clothing: Is this Retail Company Focusing on Women's Apparel Worth Betting On? (IPO)

Jul 17, 2018

With topline growth of 50% CAGR over a period of four years, should you apply to this initial public offer?

More Views on News

Most Popular

Bet on These Smallcap Stocks for Success in 2020 (Profit Hunter)

Jan 14, 2020

The smallcap rebound finally seems to here... Make sure you aren't too late to make the most of the biggest wealth making opportunity in a decade.

Guess Which Stocks Are Rising at Double the Speed of Sensex (Profit Hunter)

Jan 15, 2020

These stocks can move twice as fast as the Sensex - to take advantage of their money multiplying power get in now as the rally is still just taking shape.. read more to not miss out.

For 1,000%+ Gains, Follow the 8-Year Cycle in the Stock Market (Fast Profits Daily)

Jan 17, 2020

This is how the biggest trading profits are made.

What the Infosys Results Tell Us About the Next Infosys (The 5 Minute Wrapup)

Jan 15, 2020

If you're interested in the next Infosys, I'll tell you where to look.

How to Buy the Best Safe Stocks in 2020 (The 5 Minute Wrapup)

Jan 17, 2020

Don't fall for the safe stocks narrative going around in the stock market these days.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get our special report, Secret to Increasing Your Trading Profits Today Now!
We will never sell or rent your email id.
Please read our Terms

COMPARE COMPANY

MARKET STATS