When Cash is not Cash

Can a company trade at a Market Cap below its Net Cash Balances? Check the balance sheet of this company Mazagon Dock.

When you think about it, this should usually not happen. If a company has a market cap of Rs 1000 crore, and net cash balance of Rs 1500 crore, you can buy the company today, and close it, to get an arbitrage of Rs 500 crore.

But there are cases when this can happen.

When is cash not considered as free cash?

What if the cash is not dispensable cash? When you see a big cash number on the balance sheet, look at the liabilities as well. What if the cash is from customer advances? These liabilities have to be settled before you can distribute cash to shareholders. It is just money received in advance for services / products that are to be delivered. This is not free cash.

Let’s go back to the balance sheet of Mazagon Dock. You will see a large cash balance, much higher than the market cap. But look at the other side, and you will see a larger figure of contract liabilities.

Another case where the market may not value cash is if you can’t buy the firm. In 2010, MTNL had a lot of cash. At one point, market cap was below the cash balance in 2009. But since it was a PSU, the arbitrage was not possible. They frittered away all the cash in subsequent years.

While cash is very important in investing, remember when cash is not considered free cash.

 

Winner of the Question we asked last week

Tata Steel trumped Brazilian company CSN to win the bid for Corus. The 2 lucky winners out of the first 20 correct answers are Anusha Gupta and Varshal Jain. Congratulations! Our team will connect for your Amazon vouchers in the coming week.

 

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