Indonesian Stock Market » cash

Understand why Cash is King

bullbear — Tue, 20 Apr 2010 10:30:00 +0000

‘Turnover is vanity, profit is sanity, but cash is reality.”

The most common reason that businesses fail is not through lack of profit but through lack of cash. Many failed businesses are highly profitable but run out of cash.

Profitability versus liquidity.

Whereas profitability is the return generated by a business, liquidity is the ability to pay expenses and debts as and when they fall due. Liquidity is essential for the financial stability of a business. A failure to manage liquidity may lead to a business being unable to pay its suppliers and debt holders, which may ultimately lead to bankruptcy.

Cash is like oxygen.

A useful analogy is that profit is like food, whereas cash is like oxygen. The survival ‘rule of threes’ states that people can survive three weeks without food, three days without water, but only three minutes without oxygen. Similarly, a business can survive without profit in the short term but cannot survive without cash. If employees and suppliers aren’t paid the business will not survive for long.

When the cash runs dry.

Although this sounds simple, many businesses don’t place enough attention on their liquidity.

Firstly, businesses aren’t realistic when predicting their cash income and cash expenses. Generally, they overestimate income and underestimate expenses.
Secondly, not enough businesses regularly forecast cash flow and foresee problems before they arise. When they run out of cash, it’s often too late.

Ideal goals.

Naturally, both a healthy cash flow and high profits is an ideal goal, but in practice it is not that easy.

The short-term goal of a business should be to manage cash flow, and
the medium- to long-term goal to manage profitability.

Deciding a suitable cash balance.

Businesses should discover their optimum balance of cash flow. There is a balance between holding enough cash to meet all short-term demands and utilising cash in more profitable investments. There is thus a trade-off between holding sufficient liquid assets and investing in more profitable assets.

Successful businesses manage cash flow in the short term and profit in the medium to long term.

Why Hold Cash?

bullbear — Tue, 13 Apr 2010 15:49:00 +0000

Liquidity brings opportunities.

Do not rush to invest in stocks as soon as you have additional cash available for investing. Be patient and wait for good investment opportunities.

Holding cash or cash equivalents is not just for safety; it can help you earn more on your investments by enabling you to take advantage of opportunities that arise with brief windows in which to strike.

From this perspective, keeping some cash or investments in liquid, low-risk securities may prove to be a high-return proposition in the long run.

In some cases, it might be helpful to invest in convertible preferred stocks or convertible bonds, as long as you stay with established firms the way Buffett does.

Cash Hoard – Boon Or Bane For Shareholders

bullbear — Thu, 08 Apr 2010 12:07:00 +0000

EDUCATION | 16 MARCH 2010

Cash Hoard – Boon Or Bane For Shareholders

By Ernest Lim

Imagine if you have S$100m in your bank account, what joys and problems would you face? I believe some of the joys would entail sacking your boss, living it extravagantly but problems would include the deployment of cash, as well as, fearing for your life if people are aware of your immense wealth.

If the above situation happens to companies with large cash holdings, the management would also face similar problems, especially on the issue of effective cash deployment. So for companies with a large cash hoard, is it a boon or a bane? Let’s delve into the pros and cons of maintaining a substantial cash hoard.

Advantages

Reflective of a company with strong business performance

One of the advantages is that a large cash hoard signals that the company seems to accumulate cash faster than it can deploy (assuming that the company is effectively deploying its cash but it is still accumulating).

Furthermore, it is also reflective of a good business performance as cash is derived from profitable operations.

Buffer against bad times

Cash can be used as a buffer against bad times or mistimed acquisitions. For example, during the recession in 2008/09, companies with large amounts of debt and little cash face refinancing difficulties and some even have problems paying off the loans when they are due. Ferrochina, ex Singapore listed firm in the manufacturing sector, is a case in point.

Moreover, cash serves as a safety net against unpredictable events. Companies which carry out acquisitions, joint ventures, or maiden expansions into new markets or geographies are likely to face their fair share of failures and difficulties. Some business ventures may not reach their desired results and may run into temporary losses. Cash can be used to cover the losses in such situations.

Business facilitator

Companies with cash holdings are also likely to be able to get favourable credit terms with suppliers and banks. This is apparent as suppliers and banks have to access the credit risk of the companies which they are doing business with and companies with a considerable amount of cash holdings would allay part of their credit concerns. This would aid in the business operations of the companies.

Flexibility for future growth

Cash also provides management with a myriad of options for future growth. For example, management can decide on the following options

Look out for attractive acquisition targets either to expand horizontally or vertically along the value chain.

Carry out capital expenditure such as to acquire land for future purpose, or expand their production capacity through buying more machines etc.

Invest in listed companies purely for investment purposes.

Disadvantages

Dearth of attractive investment opportunities

One of the most obvious reasons for a large cash hoard is that management has exhausted attractive investment opportunities at the moment and is keeping cash for future opportunities whenever that may be. This does not benefit shareholders as holding substantial cash incurs an opportunity cost and also drag down the return generated by the companies. Besides, shareholders prefer companies to return cash or carry out share buybacks if there are no attractive investment opportunities by the companies.

Lack of long term planning

Some companies may not have the practice of planning for the long term. Thus, as they do not have a concrete idea of their cash requirements over the next three to five years, they would prefer to hold cash as this provide them with flexibility. Nonetheless, it is generally non ideal to invest in companies which do not execute long term planning, as “failure to plan means planning to fail”.

Agency costs

With substantial cash in the companies’ coffers, management may be tempted to use these funds to build their own empire by spending on non synergistic acquisitions and loss making projects, so as to boost their power, reputation and prestige.

Possibility of incurring suspicion and indignation from shareholders

If the cash hoard is increasing and management does not have concrete plans on the use of such funds, this may incur the suspicion on the authenticity of actual cash owned by the companies. For example, Oriental Century, a Singapore listed firm in the education sector, has a large amount of cash in its books. However, it is subsequently revealed that its Chief Executive Officer has allegedly inflated the cash holdings.

Another company, China Hongxing, a Singapore listed firm in the sports shoe and apparel sector, has been incurring the indignation of shareholders for more than a year by sitting on a large cash hoard, amounting to RMB3b at Dec 09, up from RMB1.9b at Dec 08. The collapse in its share price from the high of S$1.45 in Oct 07 to a low of S$0.055 in Mar 09 was due in part to investors’ angst and displeasure in China Hongxing management of cash. However, China Hongxing management has recently unveiled plans on how it would be deploying its cash.

Conclusion – evaluate against the overall context

To determine whether having a large cash hoard is beneficial to shareholders, shareholders have to evaluate against the following criteria:

Companies’ existing and future incoming cash flows;

Companies existing and future cash flow requirements (i.e. outflows);

Stage of business cycles;

Existing loan and interest repayments.

Thus, if the companies have concise plans to deploy their cash, either to satisfy outstanding loan repayments, or for synergistic acquisition purposes, or for capital expenditure in view of the recovery in the business cycles, then the cash hoard is a boon as it creates shareholder value.

Conversely, if management has no concrete plans to deploy the cash or to deploy them in reckless fashion, then, the cash hoard is a bane as it destroys shareholder value.

Once again, investors have to put on their thinking hats and do some work to reach a decision on whether the cash hoard is a boon or a bane for shareholders.

Ernest Lim currently works as an assistant treasury and investment manager. Prior to this role, he was with Legacy Capital Group Pte Ltd, a boutique asset management and private equity firm, as an investment manager since 2006. He received a Bachelor of Accountancy (Honours) from Nanyang Technological University in 2005. He is a Chartered Financial Analyst, as well as, a Certified Public Accountant Singapore. He is currently taking a short break before embarking on a new role.

http://www.sharesinv.com/articles/2010/03/16/cash-hoard-boon-bane-sharesholders/

Money market funds have become very popular alternative to bank deposit

bullbear — Sat, 30 Jan 2010 23:25:00 +0000

A money market fund is a type of unit trust that invests in interest-bearing instruments issued by banks, government and companies when they want to borrow money.

These short-term instruments are

traded on the money market, and
have a maturity of less than 12 months.

Money market funds have major advantages in comparison with other cash investments. For example:

You gain access to money market instruments even though you invest only a small amount.
The interest rate is higher than for a bank deposit, as you are part of a group that can bargain for the best wholesale rates.
You can withdraw your money at any time, like a call deposit at a bank.
Interest rate risk is largely eliminated because money market funds are allowed to invest only in instruments with an average term of not more than 90 days.

Units in a money market fund have a fixed value of $1, and the only changing aspect is the interest income an investor earns on that unit.

This income is capitalised, or reinvested, which means the investor earns interest on interest.

Money market funds are ideal

for pensioners who must live on their interest income or
for the creation of an emergency fund from which you can withdraw money at any time.

Money market funds also provide useful parking for investors

to limit the risk of an investment portfolio in uncertain times or
to phase in their funds.

When you invest in a money market acount, you should know the difference between the nominal and effective rate.

The effective rate is the interest rate you will earn if your money is deposited for the whole year and all the interest is reinvested.
The nominal rate is lower because this is the rate you earn every month before any reinvestment of interest is taken into account.

The ‘safe’ option of cash

bullbear — Sat, 30 Jan 2010 23:10:00 +0000

Cash has always been seen as a fairly safe investment, and our forefathers were quite happy to put their money under the mattress and leave it there.

Today we realise that you cannot just put your money away and forget about it, because inflation will erode its value.

If you want a stable income, a bank deposit is still a valuable investment option.

However, money market funds have become a very popular alternative.

The calmer waters of interest-bearing investments: their risks and rewards

bullbear — Sat, 30 Jan 2010 10:48:00 +0000

The interest-bearing investments include:

cash
bonds
the money market securities.

Compared to the roller-coaster ride of equities, interest-bearing investments are like a sea of tranquillity.

The focus of interest-bearing investments is not on the appreciation (increase) of the capital you have invested, but rather on the provision of a steady interest income – often at a fixed rate.

While shares offer you higher returns at a higher risk, interest-bearing investments offer you lower returns at a lower risk, making them a safe haven for many investors.

But this safe asset class is not safe from inflation.

Interest-bearing investments often do not generate the kind of return that beats inflation, and it is very important to remember that interest income is taxable. After taking tax into account, the return on interest-bearing investments often struggles to beat the inflation rate.

The reason for this is simple. Interest-bearing investments are normally money you lend to a bank, government, company or other institution with the undertaking that this exact amount will be paid back after a period of time.

In return for this, you earn interest.

Since you only get the same amount back after a couple of months or years, that amount is usually worth less as a result of inflation.

Your only real benefit is the income that you receive.

Interest-bearing investments also hold other risks.

This asset class is subject to the ups and downs of the interest rate cycle. As interest rates increase or decrease, your cash flow can be affected – unless you have a fixed interest rate.
Furthermore, you should beware of institutions with credit risk. A high interest rate is not everything: you must also be sure that your capital will be paid back.

The so-called junk bond market in America is well known as a market where companies with poor credit ratings offer exceptionally high interest rates. Sometimes it is better to earn less interest, but know that your money is safe.

Interest-bearing investments do, however, play an important part in an investment portfolio. Although inflation will still erode the capital value of your investment, these investments do have advantages, including:

offering you a relatively safe and predictable income.
offering you less risk and volatility than an investment in equities
offering diversification in your portfolio in case stock markets collapse
giving you instant access to cash when you need it.

Cash – low risk

bullbear — Sat, 30 Jan 2010 05:29:00 +0000

Cash is one investment from which you can never hope to make a fortune, althoug it can safeguard you against losing one.

Cash investments, including bank deposits and money market accounts,

offer you the assurance of a regular interest income and
knowing your capital will not be subjected to huge external fluctuations.

But cash also carries risk. There is no guarantee that your capital sum will be protected against inflation, as this investment does not have any inherent growth potential.