Cash on Balance Sheet - Real Value or perceived
Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Equity Valuation Techniques
Forum Discription: While valuing equities no individual technique works. Mostly it is a combination of techniques. Discuss the various techniques in equity valuation ranging from PE to RoE to Market Cap
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=1638
Printed Date: 01/Jul/2024 at 5:52pm
Topic: Cash on Balance Sheet - Real Value or perceived
Posted By: basant
Subject: Cash on Balance Sheet - Real Value or perceived
Date Posted: 23/Feb/2008 at 3:14pm
Very interesting situation but even in listed companies the problems originate because:
1) The deal to sell off land is not transparent i.e. you take some in cash some in cheque kind of stuff.
2) The Management might not give a one time dividend but continue to hold the cash. In that case company becomes cash rich instead of shareholders. For example Trent has maintained a Rs 100 per cash on its balance shjeet for the last 5-7 years!!!
3) Once this cash has been received the management might take up new diversification programs and that comes witha gestation so that is not why interested parties would have bought a stcok.
4) Shareholders are most uncomfotable when companies hold cash a cash equivalent can get a RoE of 9% only so putting a PE of 9 (growth) to this cash equivalent the final value is 81% which means that cash in balance sheet is always valued at lower of what it is and companies appears cheap!
 Best way to unlock value is the simplest which never gets done it entails:
a) Buy back shares from open market with cash received.
b) Declare a one time dividend with the money received.
We can discuss companies that hold cash on balance sheet here! ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Replies:
Posted By: Janak.merchant1
Date Posted: 23/Feb/2008 at 4:42pm
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Very interesting situation but even in listed companies the problems originate because:
[/QUOTE]
1) The deal to sell off land is not transparent i.e. you take some in cash some in cheque kind of stuff.
2) The Management might not give a one time dividend but continue to hold the cash. In that case company becomes cash rich instead of shareholders. For example Trent has maintained a Rs 100 per cash on its balance shjeet for the last 5-7 years!!!
3) Once this cash has been received the management might take up new diversification programs and that comes witha gestation so that is not why interested parties would have bought a stcok.
4) Shareholders are most uncomfotable when companies hold cash a cash equivalent can get a RoE of 9% only so putting a PE of 9 (growth) to this cash equivalent the final value is 81% which means that cash in balance sheet is always valued at lower of what it is and companies appears cheap!
Best way to unlock value is the simplest which never gets done it entails:
a) Buy back shares from open market with cash received.
b) Declare a one time dividend with the money received.
We can discuss companies that hold cash on balance sheet here! Dear Basant, Trent will have to hold that cash for their future expansion. Same is the case i feel is with 3M. 3 M has plans to set up manufacturing base here when they get enough volumes. Otherwise it does not make sense to manufacture here. And they do not want to borrow at the time of expansion.
Management has to look at things differently. What you said abt lack of transparency in RE deals is fact which we have to accept. You are also right abt co becoming rich and not shareholders as there might not be one time dividend etc. So our view as outside investors wud be different than the promoters. I agree with you abt what u have stated.
So basically we are at the mercy of their decisions. But if u know what they r doing, then to a certain extent we can make out what thay are doing with cash. I am refering to honest managements. Who are holding majority of the shares and are shareholder oriented.
Lets us c this situation: The real one. Capacity 6000 tonnes, about five years back. Free cash flows all these years. Cash accumulated and invested in MFs. Capacity has slowly been built up from 6000 to 40000 recently during 2007-8. All the cash accumulated has now been put to use for the core business expansion. Share was quoted 24 when i bought it. It went down to 18. Now 150. All these past five six years, co kept on accumulating cash. I recommended them to go for buy back as market was not realising that intrinsic value was going up. Not becoz of cash getting accumulated but capacity was silently being ramped up without getting reflected on the A Report. Co did not want to borrow funds for their aggressive expansion plans.
They are targetting 200 crores sales within next two years. Capital is 6.5 crores. Products to a great extent are commodity type. But costing is their moat. MArgins will be under pressure as they also do not expect to maintan them. Now coming to the right point, they do not have any need for capex as their capacities have already been enhanced to the desired levels. So on 200 crores sales, if they make 8 % at the net levels, it wud mean 16 cr profits. Free cash flows are imp factor here. Since no major capex is expected, they do not need it, cash wud again go up.
How do u view this business developments? Wud u invest in this co tho products are of commodity nature? They have 12% all india market share. With added capacity that wud go up. Market share is not imp but it just gives idea abt the small overall market.
Your view wud be highly appreciated.
Best wishes,
------------- I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money. |
Posted By: Azure
Date Posted: 10/Feb/2009 at 7:58pm
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Basantji... I have a question regarding Balance Sheet...
In a balance sheet where can we see the money raised from IPO...???
As we know DLF raised 9000 crores from IPO but in balance sheet where can we see that value..?
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Posted By: sureshbazi
Date Posted: 10/Feb/2009 at 8:53pm
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Balaji Tele trading at Mcap 250crs and they have cash balance of 250 crs. so it is trading at cash levels. i agree that growth is a problem. there are many companys like this and many are trading below cash levels making the business value free. is the valuation is correct for these business which is trading at free of cost ? this cash is generated because of the same current business. ------------- 'It is only when you combine sound intellect with emotional discipline that you get rational behavior.' – WB. |
Posted By: basant
Date Posted: 10/Feb/2009 at 10:14pm
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Is this their own cash or do they have debt on the balance sheet also. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: Azure
Date Posted: 10/Feb/2009 at 10:19pm
Please answer my query too. ------------- |
Posted By: Mr. V
Date Posted: 10/Feb/2009 at 12:32pm
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Balaji Telefilms is a zero debt company. |
Posted By: investor
Date Posted: 10/Feb/2009 at 7:28am
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Yes, but do we know for sure that the 250 cr exists?
------------- The market is a place where people with money meet people with experience. The people with experience get the money while people with money get experience! |
Posted By: Mr. V
Date Posted: 10/Feb/2009 at 8:40am
According to the annual report, its all in debt/liquid mutual funds. |
Posted By: Azure
Date Posted: 11/Jan/2012 at 5:37pm
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Please define these terms in an Indian Balance Sheet?
A. Loans and Advances B. Deffered Credit C. Share Application Money Also, how do you calculate "Total Value Addition" in a Profit and Loss statement? And, What do you mean by "Authorized Capital", "Issued Capital", "Paid up capital"? ------------- |