Cash Is the King in Equity ValuationCash is the KingRealising importance of cash in stock valuationBy Shrinivas TapadiaSetting the PremiseStock Markets have witnessed a blood bath in the whole of 2008. With fears of economy also going into recession there seems no hope for Bulls to return to the market. The commonly used parameters like PE, EPS, Book Values, Price to Sales, EV, EVA, etc all seem to have failed investors. Even though on these counts all the blue chips have started to look a lot attractive still there are no takers for these stocks. Why?The issue looks complex. But the answer is in traditional financial management. Simply put, in recessionary times investors are not going to be flattered by growth claims of a company. Because growth claims are going to land in a rough patch in terms of increased interest costs, input costs, and uncertainties in organic growth of a business. So what can attract them? Not just Indians but people all over the world seem to favour cash in such uncertain times. That’s also the key for selecting stocks for investing. Importance of Cash:The reality is that “cash is king” without cash, a company won’t last long. That may seem obviously simple; however there is a long list of companies that failed because cash was in too short supply. How much cash a company can generate is one of the more important measures of its health. Yet, one hears more about P/E than almost any other metric on valuation, but it does not give you an accurate picture of a company’s ability to generate cash. Cash flows are generally confused with net income of a company. Operating cash flow (OCF) is not the same thing as net income, but is derived from net income through a series of adjustments to working capital accounts on the balance sheet. This is an accountant’s way of saying that OCF details how cash flows into and out of a company. If more flows in than out, the flow is positive, if not, the flow is negative. Valuation will be affected when company is able to post a positive earning and still suffer from negative OCF. If a company is regularly spending more cash than it is taking it, something is obviously wrong. This may obscure short-term problems such as burning cash, however sooner or later the company will have to face the basic issues that are causing the cash drain.Some common sense approaches to stock analysis rely heavily on answering questions of the likes of: What are the sources of the company’s cash flows?John Burr Williams taught us that the value of any asset is the net present value of its discounted cash flows. Before the investor can even begin to value a business, he has to know what is generating the cash. It is important to be specific and avoid making assumptions.
Inventory
Why don’t we take an even more general view of current and future demand? By the way, if stocks are so valuable that they cannot be discounted, the average value of a commodity will be higher than the average supply. If we look at the long term, we can see that long-term demand cannot last in an environment where capital markets are so volatile that they cause an enormous shortfall of liquidity for a long period of time.
There are other ways to look at stock markets.
Investors are exposed to risk, which is why so many investors hold in their portfolios stocks for a long time, even when the stock will be down.
In some ways, a lack of exposure, lack of investment quality, or lack of capital availability can lead to a negative risk-taking relationship.
And that may seem to me like an odd issue to discuss, as it seems to me that investors and investors do not have a different idea of what is a good combination of risk and return on their investments.
What is the real value of a portfolio when a strong company starts making money? Is this due to the same factors that make stock market participants very happy, or do we see similar opportunities? In this article I outline a set of tools for assessing stocks and see how they hold up in an environment where they may be priced out. And in terms of investing, we look at a number of alternatives, such as index investing and index diversification, too.
A short explanation
Why investors may care so much about stock markets is probably due partly to the fact that they often have a relatively low interest rate for high-quality products.
But if you want to know if there are problems with our view on the stock market, it is much higher for stocks that have not been held up long at all, or have not met expectations of market valuations, or otherwise have performed in the same time period.
It is worth looking into when the demand for stock markets has been strong