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The Equitymaster Research Digest

Cash vs Valuations, System vs Strategy, Robots vs Humans
Jan 27, 2017

  • Cash vs Valuations
  • System vs Strategy
  • Robots vs Humans

What is the value of cash on a company's balance sheet? The answer is inconsequential if the cash is just 5-10% of the stock's market value. However, if a whopping 90% comes from cash, it casts a big shadow on valuations. It can no longer be ignored. So how much cash is too much cash?

The recent BSE IPO brought us face to face with this dilemma. The offer was priced at Rs 806 per share. On earnings alone, it was valued at a steep 36x its latest annualised earnings.

There was a twist in the tale though. Big enough to give it an entirely different ending.

The company had a massive Rs 38.6 billion in cash and investments on its balance sheet. On a per share basis, that's Rs 708 per share, almost 90% of the offer price.

We still gave the IPO a pass. There was no clarity on what the company would do with this huge cash hoard. It could well remain on the balance sheet, losing its value with each passing year.

Investors will value the Rs 38.6 billion differently depending on when they expect this hoard to be realised.

We, wanting to be conservative, assumed it would never be realised. In our analysis, we only considered BSE's other income arising out of these holdings and left the cash holdings out of the equation entirely.

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