Milking A Cash Cow

Wouldn’t it be nice to own the shares of a company that generate a lot of cash consistently? Cash is the lifeline of any company. Companies need cash to pay suppliers and employees so it can produce goods and services to sell at a profit. Companies that generate good cash flow sells goods and service you need on a regular basis. They are in industries like telecommunication, retail and public transportation.

SMRT (S53)

Source: ShareInvestor.com

SMRT is in the public transportation business. It operates trains, buses and taxis in Singapore. SMRT is an example of a cash cow company. SMRT buys expensive vehicles with debt which it can pay later and collect cash up-front when you take the MRT, bus or taxi. This way the company generates cash consistently because the public transportation business is generally a defensive business. This means it should do well in good or bad times. In bad times you can either walk or take public transportation.

Cash Flow Analysis

Profits

Most investors look at the profits of a company before deciding whether to invest in it. Very few would bother to look at the actual cash generated from the profit stated. Profit is not all cash. That’s why we have to adjust it using the cash flow statement to get a clearer picture.

Cash Generated From Operations

This is the most important part of the cash flow statement. It shows you whether the company is generating cash from operating the business. In the case of SMRT, although it stated a profit of S$191.741M in FY2011, it generated a whopping S$283.320M in cash from operation. Why is this so? It is because most of the cost of operating a public transportation system is depreciation which is a non-cash item that is added back to operating cash flow.

Cash Generated From Financing

This is where the company ask the banks and shareholders for money or give them money. For SMRT, in FY2009 and FY2010, the company classified dividend paid out to shareholders under operating cash flow. In FY2011, it is classified under financing cash flow. If you make adjustments for the dividend in FY2010 and FY2009, the figures are about the same as FY2011 (S$128,269). SMRT borrows money using a debt instrument called notes. It rolls over the debt by issuing another note to pay for the previous note. Hence SMRT only have to pay the interest on the notes and the principal amount can be rolled over indefinitely.

Cash and Cash Equivalents At End

This is the amount of cash the company have at the end of the day for the financial period stated. Even though SMRT pays about S$100M in dividend every year, its cash pile has grown from S$245.599M in FY2009 to S$376.218M in FY2011.

With cash accumulating in SMRT’s coffers, it could do many things with it. It could hire more talented people with more money, invest in overseas public transportation and if the cash pile grows large enough, it could even make a capital distribution.

Discount to Cash Value on ShareInvestor.com

ShareInvestor.com provides a list of stock sorted by discount to Cash Value in ascending order via this link for subscribers. Below is a screenshot of the list of stock. Generally the higher the discount to Cash Value, the “cheaper” the stock compared to its Cash Value.

Source: ShareInvestor.com

Below is a screenshot of the location of the financial ratios on the factsheet.

Source: ShareInvestor.com

 

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