Skip Olinger

The 15 Most Cash Rich Companies

GOOD ONE!! YOU SAID, "Just as you would not extend your mortgage to pay for day to day living....." I assume you meant that as a joke as that is exactly what people were doing over that 5 years that brought on the current Depression?


On Mar 16 05:13 PM Anna Coulling wrote:

> Finding a cash rich company in which to invest is an important first
> step but trying to establish where the cash is coming from and where
> it is going is even more important. I was given these tips by some
> specialist insolvency accountants (and they should know!).
>
> It seems we all need to understand a balance sheet these days and
> short of becoming forensic accountants at the very least we should
> try to find answers to the following three questions. Number 1
> - Where is the cashing coming from? Companies can boost short term
> cash flow by borrowing or selling assets. However, there are only
> so many assets that can be sold and without a regular inflow on cash
> a company will soon run into trouble. The number to look for is
> “cash flow from operating activities” – this shows how much cash
> is generated from the company’s core business activity. A negative
> number is a red flag and always check back a few years to see if
> there is any pattern. Highly volatile operating cash flows can suggest
> trouble – Enron was a classic case in point before it failed.
>
> A firm can also enhance operating cash flows by delaying payments
> to suppliers just before the financial year end so always take a
> look at the note that supports the cash flow figure (usually placed
> a few pages back) and look for the number showing “change in creditors”.
> If this number has jumped without a corresponding rise in activity
> – “cost of sales” – in the profit and loss account, be suspicious.
> It is also worth comparing the firm’s “operating profit” to its “operating
> cash flow”. Big variations, or an operating profit not matched by
> a similar amount of operating cash flow are both warning signs.<br/>
>
> Number 2: Where does all the operating cash flow go? Analysts often
> quote “free cash flow” which should be positive and ideally consistent
> with past years, allowing for changes in activity. For example if
> sales have decreased 10%, free cash flow will probably have fallen
> as well and should be in proportion. Companies such as Tesco have
> been able to expand rapidly by using huge free cash flows to buy
> freehold sites. However, if a company is enjoying high levels of
> free cash flow and not expanding or paying it back to investors as
> a dividend, be concerned. Also consider the relationship between
> free cash flow and the equity dividend. If free cash flow does not
> cover the dividend at least twice, future payouts could be at risk.
>
>
> Number 3: The final area to look at is the “cash flows from financing
> activities” section. Just as you would not extend your mortgage
> to pay for day to day living, a typical bankruptcy candidate will
> raise long term finance as new debt or equity and then use it to
> keep trading. So compare the total raised as debt or equity in the
> “cash flows from financing activities” section and the amount being
> spent on new assets in the “cash flows from investing activities”
> above it. A big mismatch with no explanation from directors is another
> warning signs.
>
> In addition look at a company's “Altman-Z score” This indicates
> the probability of a company entering bankruptcy within the next
> 2 years. The higher the Z score, the lower the probability of
> bankruptcy. An Altman score above 3 indicates that bankruptcy is
> unlikely; a score below 1.8 indicates that bankruptcy is possible.
>
>
>
> Finally always look at the directors' dealings - are they buying
> or selling.