Cash is King !

The term "Cash is King" has a wikipedia entry. It reads, "Cash is king is an expression sometimes used in analyzing businesses; it refers to the importance of cash flow in the overall fiscal health of the business ... A company could have a large amount of accounts receivables on its balance sheet which would also increase equity, but the company could still be short on cash with which to make purchases, including paying wages to workers for labor. Unless it was able to convert its accounts receivable and other current assets to cash quickly, it could be technically bankrupt despite a positive net worth."

An interesting article appeared on the importance of cash on CNBC-TV18 (here), which claims that about 70% of companies reported a drop in net cash flows from operating activities. This is crucial because a strong operating cash flow pays for all capex requirements of the organisation and dividend to shareholders. If cash from operations declines for a company, then it might have to borrow from the market to finance it's growth plans. Given the current rate of interest, this is a double whammy - and needs to be factored into every stock evaluation.

Largest Build up in Cash Flows :



Biggest Drop in Cash Flows :


Note: I checked Pfizer (here). The net cash from operations is 17 crs and not 23 crs as stated in the article. There has been some extraordinary earnings for Pfizer which may change some variables in calculation of cash flow (i think, but not certain) .. so I'll not delve into it for now. To illustrate an example outside this list, Hero Honda's net cash from operations slipped from 936 crs in FY06 to 625 crs in FY07. In the same period, profits dropped mildly from 971 crs to 857 crs.

Net net, the importance of cash from operations cannot be ignored. This is the lifeline of most businesses and any decline in these numbers should be looked with the minutest precision before allocating your capital for these stocks.

If you like this content, then do check out my new blog on investing and stock markets for lots more information on the Indian equity markets