How to find Cash Rich Companies (in 2 simple steps)

Are you tired of finding good stocks? Or you’ve never tried to find one?

Whatever the case, don’t worry. Today, I’m going to show you a simple trick to find an excellent stock with almost no work.

There are many parameters to find an undervalued stock. In this article, I’m going to talk about the primary key for picking up an excellent stock.

And the best thing is Google will work for you. For free.

You heard it right. They will email you whenever they find a Cash Rich Company.

What? I just revealed the secret.

Yeah! Concentrate on Cash Rich Companies.

They are easy to find and 90% chances are they are fundamentally good companies. The best example of Cash-Rich Companies is Apple.

Once in July 2011, Apple had more cash reserve than whole US treasury, the government had an operating cash balance of $73.8 billion and Apple had 76.2 billion. In simple words, Apple can alone fund the whole US to run its operational activities.

But why Cash Rich Companies are good companies?

it’s a question asked by many baby investors.

Generally, the company with huge cash reserves are the one that has opportunities to grow in future. They can use their cash for profitable ventures instead of raising debts or equity which increases the interest cost or decreases the power among shareholders respectively.

That growth can be of 2 types :-

• Organic
• Inorganic

Organic growth means growing the existing company by adding more plants, workforce, raw materials etc which eventually increases the sales and profit.

Inorganic growth means growing the existing company by acquiring other good companies. Like Wipro to Acquire HealthPlan Services, a Leading Technology and Business Process as a Service Provider in the US Health Insurance Market

You can look many companies like this all over the net. Notably, Indian had the highest number of M&A deals ever in this first half year of 2016.

So former is helping to grow directly and later adds up profit indirectly. Mature companies in Sensex mostly opt for inorganic growth.

That is why Cash Rich Companies have a great opportunity to grow in times and Warren Buffett the most successful investors always looks for the companies with high cash reserves. That’s enough to show the relevancy of this types of companies.

Now I’m going to show you some ways to find Cash Rich Companies. It’s time-consuming but as I said earlier Google will work for you so I’ll show you how to use this resources to work for you.

This technique talks about having a peak over company’s balance sheet and notes to account. Here are the steps :-

• You can access their balance sheets from moneycontrol but for a detailed version download their annual reports. Later would be a good option.
• Then you just have to look over its “cash and cash equivalent” and “investments” section in the balance sheet (you can see these both under current assets). Also, consider remembering their notes to account number i.e. – 13 and 16.

• Now, you had to figure out what is the reason behind this changes in cash.

Did the company paid the dividend?

Did the company buy back its shares?

Did the company reduce its debt?

Did the company invested in the stock market?

You can figure it out by just going to the “notes to account” of these 2 sections. The company is having investments in many debentures, MFs, equities etc. Below is just a snapshot. If you access their annual report, you can find more than 1000 investment vehicles they had invested. I just can’t figure out how they manage to manage all these different sources at the same time.

It’s the description of Cash and bank balances company has with them. It is quite simple.

Unpaid dividends are the dividends which are not yet claimed by shareholders. To have a peak of extreme allocation of cash among different heads, consider looking the Cash Flow Statement. It will show you how the cash entered in the company, where had it allocated and from where the cash exited the company.

It had 3 heads :-

• Cash from Financing activity
• Cash from Investing activity
• Cash from Operating activity

Snapshot below.

However, there is a method on how to judge the company’s cash flow – Discounted CashFlow (DCF). Consider reading this – How to Value Stocks using DCF

Whatever the reason behind the change but did that action contributed any positive results to the company? – This is the million dollar question which denotes whether the company is using its cash in a positive way. And that’s what we should know to conclude whether the company is worth investing.

The cash which is really helpful for company growth is Free Cash Flow. This is well explained in Valuepickr:

Free Cash Flow

Cash Flow from Operations measures how much cash a company generates. It is the true touchstone of corporate value creation because it shows how much cash a company is generating from year to year. As useful as the Cash Flow statement is, it does not take into account the money that a firm has to spend on maintaining and expanding its business. To do this, we need to subtract Capital Expenditures, which is money used to buy fixed assets.

Free Cash Flow =Cash Flow from Operations – Capital Expenditure

Free Cash Flow enables us to separate out businesses that are net users of Capital – ones that spend more than they take in- from businesses that are net producers of Capital, because its only that excess cash that really belongs to shareholders. Free Cash Flow is sometimes referred to as “Owners Earnings” because that’s exactly what it is: the amount of money the owner of a company could withdraw from the treasury without harming the company’s ongoing business.

Rough benchmarks for stock analysis – Free Cash Flow

As with ROE it’s tough to generalise how much free cash flow is enough. However its reasonable to say that any firm that is able to convert more than 10% of Sales to Free Cash Flow (just divide Free Cash Flow by Sales to get this percentage) is doing a solid job at generating excess Cash.

I’m soon going to write an article on “How to read annual reports”, stay subscribed to get notified.