Corporate Cash Balances Are Just Half The Story

Includes: BDRAF, SU, TECK
by: Mark McQueen

For the last 12 months, I've had the pleasure of charging over to the Business News Network's Toronto studio at Queen & John each week to spend some time on set with Kim Parlee and Andrew Bell. There are five "featured guests" at 3pm, and we all have our own regular slot/day; mine being Thursday. I try to do as many as I can, in case someone actually cares, barring summer holidays and business trips.

Since our firm doesn't sell investment products to retail investors via the brokerage industry, folks occasionally ask: why do you do it? The truth is, Ms. Parlee asked, and I usually have a tough time saying no to people I respect. There are times, however, when this weekly forum provides the opportunity to talk about an important topic to a broader audience that is normally available via our backwater blog.

Yesterday's show was one of those days, and the topic was Bank of Canada Governor Mark Carney's Wednesday speech to the Canadian Auto Workers' convention. I told our audience that I thought is was fabulous that a senior public figure would accept an invitation from a notoriously tough Union. I suspect that Bay Street folks sometimes forget the important role that unionized workers play in growing so many public and private companies across Canada. I was delighted that Governor Carney had the good sense to demonstrate that Canadians do recognize, and appreciate, this simple fact. It also gave him a chance to explain the current facts of life about global trends in the manufacturing industry, although the newspaper headlines were all about "Corporate Canada" sitting on a pile of "Dead Cash".

I get the point that corporate cash balances are higher than they've been for years, on aggregate. Governor Carney encouraged Canadians to invest in "productive assets" in his CTV interview two weeks ago, and in this speech he was now jawboning CFOs to do that same. It may well be that cash balances are higher than they "need" to be, not that I know exactly how to define the "right" level given the economic backdrop of Europe.

I do feel comfortable offering some insight into the current mood of Corporate Canada. The international financial crisis is still a very recent memory for most in business, and it cannot be denied that Greece, Spain and Italy currently appear to be the sovereign versions of Bear Stearns, Lehman Brothers and Morgan Stanley circa August 2008. Telling a CFO to "get out there and spend" with that backdrop is kind of like advising a heart patient who recently went through an angioplasty procedure that he should rush headlong back to Bardi's Steakhouse for his favourite 24 ounce Rib Eye.

Then there's the specific details of these allegedly high corporate cash levels. The Globe and Mail highlighted several companies as being examples of the cash rich cabal: Suncor (NYSE:SU), Teck Resources (TCK) and Bombardier (OTCQX:BDRAF) were three of perhaps a half dozen sample. Bloomberg News also touched on Teck and Suncor in its coverage on Friday.

Perhaps these firms do carry more cash than three years ago, but cash is never the entire story. There's another side to the balance sheet, as any venture debt lender knows. I used Teck, Suncor and Bombardier as my BNN examples to show that this subject isn't a cut-and-dried as you might first think:

Cash on hand, but debt too!

Using latest annual audited financial statement report for each company:

Teck Resources:
Cash: $4.4 billion
Debt: $6.7 billion

Cash: $3.8 billion
Debt: $10.8 billion

Cash: $3.4 billion
Debt: $4.7 billion

When you tally up the debt figures, it tells a different story. None of these poster children have net cash on hand. Whether or not they are underlevered or overlevered entities depends upon their business fundamentals: such as trailing and forecast EBITDA, net income and free cash flow. Those metrics, and their sustainability in the face of a global recession, are the only way to truly gauge whether or not these three media examples are cash rich or digging their way out of an earlier debt hole.

A lot of folks are in the mood to pay down their debts right now: individuals, corporates, even the Federal government. The European fiscal mess appears unresolvable, and that's crimping growth around the world, including the once hot BRIC nations.

Those conservative Canadian CFOs want to still be is business five years from now. Building cash on hand to balance off existing debt levels could be the key. Can you blame them?

Disclosure: No positions

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