Many investors who attach great importance to the debt and the level of corporate cash prior to invest any kopek ... and they are right!
We want to draw your attention to the pitfalls of such securities.
Indeed, there are actions that appear to be large banks but, ultimately, do provide a poor return if you buy them.
We will help you in your quest of shares to cash by defining three different categories of values "piggy bank" ... and their characteristics.
1. First, shares equivalent to money market funds
These are mainly companies that have more activities, empty shells, former holding that liquidated their assets and who no longer hold that the fruit the sale of their prized assets: cash.
note, there is no prospect of generating cash flows in such a society. This means that time is against the investor in terms of opportunity cost .
An investment becomes interesting in this class action Only when the discount on equity - which are supposed to be 100% by the company's cash flow - is important. It is a necessary safety margin to guard against two main risks:
1) use the cash to start a new activity;
2) or the sudden opportunity related to the time required by management to make the cash to shareholders either through dividends or liquidation of the company.
This operation may take more or less time. And during this time (from several months to several years), money that the investor has invested in this title can be invested in other securities with the highest potential.
Rounds.com Golf is the perfect example as money market funds. The company is valued USD 1.1 million. Its capital is comprised solely of cash: 2.0 million USD. No debt on the balance sheet. Each quarter, the overhead of 40K USD just "eat" the cash that is reduced gradually.
What interest to invest in securities Golf Rounds.com? No, if shareholders do not decide to liquidate the box as soon as possible or distribute a dividend soon. This is a perfect example of the destruction of shareholder value ... unless the majority shareholder and management are the same people, which may explain this slurping!
There are many companies in this situation. Just look at the similar case of Altex Industries : 3.6 million USD cash without debt, annual operating expenses of USD 0.4 million and a market capitalization of USD 1.7 million.
Clearly, buy these companies is to make a bet on the goodwill of the mangement / create shareholder the real "shareholder value".
2. Securities that have a large net cash
This second category includes all shares of companies that do have an activity and therefore the assets related to this activity. Net cash - more or less abundant - is more the icing on the cake.
net cash which represents a good share of market capitalization, it is ... but not enough. Indeed, we must be sure that the company may at one time or another in this cash back pockets of their owners: the shareholders.
That is to say that this cash should be stable over time (not to be pumped by expensive investments, bad management decisions, activities consuming dwindling cash flow, ...). It should take a look at the expected profitability of the company and its ability to generate cash on a recurring basis.
Finally, always favor companies with simple activities where technological breakthroughs are low and preferably with a war chest denominated in your currency. Look what happened recently in Venezuela with the devaluation of the Bolivar Fuerte: http://www.lesechos.fr/info/inter/reuters_00220342-venezuela-la-devaluation-arme-a-double -edge-to-chavez.htm
Other pitfalls:
- liabilities "non cash" very important
- Capital weaklings
- a non-cash " reliable "(cash currency exotics)
3. Actions that have cash and cash flows
The latter title is different from the second category in the sense that any regulator of equity securities of companies that has activity, a big cash and which generates recurrent cash flow is a much safer investment . If this title is purchased at a reasonable price (eg in the value of net cash) , there is a great chance to make it a worthwhile investment.
Indeed, in this third case, provided that the activity is a minimum of recurrence or can be estimated a backlog and / or prospects for growth in the area, then nothing prevents the management to pay a big dividend to shareholders without jeopardizing the business.
In this category, titles and NCI Moury Construct are quite a place.
Other pitfalls:
- the non-recurring cash flows (eg cashing one-shot "of a significant amount due to the favorable conclusion of litigation / trial)
- cash generated in exotic currencies (different of the euro in our case)
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