Balance Sheet Analysis: Cash




















Unknown 7/15/2009  

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Lawrence D. Loeb 7/15/2009  

Good post Hunter.

It is also important to look at how the revolver loan (if any) relates to cash balances. Companies sometimes use the revolver as a piggy bank and try to maintain near zero cash balances, although that strategy is much more difficult in the current capital environment.

Analysts also need to look at the Current Liabilities section for any specific liabilities that the cash may be supporting, such as Prepaid Revenues. Some companies are lucky enough to collect revenues in advance of services that they provide. That cash, however, is not free to spend. A portion of it will have to be spent to support the services that were paid for.

Another item to watch for is cash held in reserve as part of a bank agreement.

Your discussion of overseas cash is very interesting, and important. Several years ago, the US Government allowed a short time frame for companies to repatriate funds tax free - so it is a real issue.

Foreign governments aren't happy to see those funds leave. They'd prefer to have those funds invested locally, and create difficulties with currency controls.

Cash is a simple subject, with a lot of VERY important subtle aspects.

Very good start.

Kevin Rogers 7/15/2009  

Nice job. Also keep in mind that some cash might be restricted cash and not available for day to day usage. Some times companies will label "restricted cash" on the balance and sometimes not. In the latter case, its likely to be somewhere in the footnotes. To re-interate what Hunter just said.. "dig dig dig" into those footnotes.

Anonymous,  7/16/2009  
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Unknown 7/16/2009  

Great post. As you indicated, the challenges are formidable. How do you start your screening process. any favorite sites? criteria?

Next how do you determine what the incremental return on capital is?

Finally(for now) what about determining management's incentives are? Finding compensation figures seems pretty easy but I'm unsure as to how to determine if it's on a EPS, sales or return on invested capital.

Thank you for a great site

Anonymous,  7/23/2009  

Terrific post. I wonder, though, how you respond to the argument, noted by Klarman among others, that you learn 80% of what you need to know in the first 20% of the time you spend learning about an opportunity? I ask because there is practically an infinite amount to be learned about any security, a limited amount of time in each day, and a world of securities to review. One must be diligent, but when does one know that one has been diligent enough? I'm not dissing the hard work -- I'm just wondering how you apportion it.

Anonymous,  7/27/2009  

Interesting analysis on cash, but one question. From a corp fin perspective if the lodging company had no internal opportunities and since deleveraging would reduce equity returns, they either pay the money back as a dividend or repurchase stock. Tenders are stronger signals than open market repurchases but both accomplish the same thing. Sharholders get a return of captial, and are selling at quite a nice valuation at 22x EBITDA. While theoretically you are indifferent to a dividend or repurchase, what was large equity cusion on debt could become much smaller when markets decline so precipitously, so I prefer special dividends. Nevertheless, a company is right to return cash to its sharholders, I don't like when companies hoard cash and empire build or sit on shareholders' money trying to time the market with share repurchases.

Anonymous,  3/19/2012  

Hi Hunter,

Did you ever write a part 3, continuing where BS Analysis:Cash left off?





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