The correct way to find cash-rich companies

Last Updated on Apr 6, 2021 by Manonmayi

Cash is King might be an overused phrase but it is a universally acknowledged truth. Cash is the lifeline of an enterprise, a key factor in its potential for long-term success and a principal performance metric. It is a measure of how successful a company will be in executing investments and innovations, what will be the quality of dividend payouts and how prepared they are for the troubled waters.

Making money from equity in a directionless market is tricky. One way to be a smart investor and beat the tricky bugger is to invest in companies with good cash reserves. Companies with good cash reserves can mark themselves safe during disasters such as low liquidity, foreign institutional investor outflows, and high-interest rates.

There can be multiple ways to screen and evaluate cash-rich companies but the genius is in trusting a mathematically tested method. Here, we would like to take the opportunity to introduce our Cash Rich Screens: Cash Rich Smallcaps and Cash Rich Largecaps. These screens are a group of high-profit cash-rich companies from Nifty Smallcap 100 and Nifty 100 Index. More details about the screens are as follows.

Selection Criteria of the stocks:

Metric (all values are year end)	Value	Rationale
Earnings Per Share	Greater than 0	To filter the most profitable firms
1 year historical EPS growth	Greater than 10%	To filter firms with high earnings growth
Cash Flow From Operating Activities	Greater than 0	To filter cash-generating firms from core operations
1 year historical CFO growth	Greater than 0	To filter firms with growing cash
Net change in cash balance	Greater than 0	To filter firms with an increased cash balance at the end of the year

Test Results

Cash Rich Smallcaps

We applied these filters historically on the constituents of Nifty SmallCap 100 Index to screen stocks at a pre-defined periodic intervals. The equi-weighted portfolio of screened stocks outperformed the index with a CAGR of 14.24%, compared to the index’s CAGR of 5.97%. (since inception).

Cumulative Outperformance over Nifty Smallcap 100

Cash Rich Largecaps

We applied these filters historically on the constituents of Nifty 100 Index to screen stocks at a pre-defined periodic intervals. The equi-weighted portfolio of screened stocks outperformed the index with a CAGR of 11.74%, compared to the index’s CAGR of 9.18% (since inception).

Access these pre-built screens on our screener under the “Basic” screens.

A smart investor knows when to be fearful and never throws caution out of the window. Besides the cash level, other factors should also be considered before choosing a company. Many companies line up cash, either for acquisitions or to build additional capacities. Companies in some sectors may hold back from investing because of regulatory issues, hence increasing the cash reserve. It is extremely essential to evaluate the capital allocation skills of the management of these companies before investing.