To a Business – Cash is King!

Investing in share is like investing in the business itself. As value investor, one should always consider himself a shareholder of the company he is investing in. Remember, you are not speculating, but buying into the company with the hope that the money invested will grow over time as the company is making profit.

The above may sound simple in words but trust me it is so hard to put in practice.  When emotion kicks in, when news or tips are so good to be ignored, and when things do not turn out as we wish in short term, that is when the self panicking will prove to be too strong that cause ones to make wrong investment decisions.  I have seen many examples of people buying into a counter based on news or recommendations by fund managers, when clearly the company lacked of fundamental strength to substantiate the recommendation.

Apart from looking at most fundamental attributes such as Current ratio, Liability to Equity ratio, EPS, ROE, healthy balance sheet, P/E, one of the key elements that I will certainly not miss is the cash flow statement from the annual report.  As shown on the example below for Perisai Petroleum, the cash flow for 2015 shows a negative net cash i.e. cash generated from operating activities are not enough to cover the financing activities (loan interest) and losses from investing activities. Despite having -ve net cash for the year, the company is still maintaining +ve cash pile due to its retained cash from previous years.  From this example, is the cash flow acceptable? As I mentioned in my articles on Fundamental Analysis, we shouldn’t be relying on one factor to make investment decision. However, from the historical figures, the company is certainly having trouble to serve its future loan with the retained cash of just 36.18mil as the expense from financing activities alone is going to be 49mil if not more.

Perisai Cashflow

Perisai Cashflow


Lets look at another example, TAANN, a plantation company which has a very good record of +ve cash flow.

TAANN cash flow

TAANN cash flow

Comparing side by side, its cash flow from operating activities almost stay the same for year 2014 and 2015.  The company was able to maintain a positive cash inflow for both years. This has a positive effect on cash carried forward and thus making the company capable of fuelling its future growth.  Coupled with other fundamental factors, one can then make decision to whether to invest and when to invest.

So, what cash flow really is? Cash flow is of vital importance to the health of a business.Whilst it may look better to have large inflows of revenue from sales, the most important focus for a business is cash flow. Many businesses may continue to operate in the short to medium term even if they are making a loss. This is possible if they can, for example, delay paying creditors and/or have enough money to pay variable costs. However, no business can survive long without enough cash to meet its immediate needs. A positive cash flow occurs when a business receives more money than it is spending. This enables it to pay its bills on time.  Cash flow is always important, but especially when it is not easy to obtain credit. When the economy is in recession, financial service providers are reluctant to lend money. Borrowing also becomes more expensive as interest rates are raised to partially offset the risk of borrowers not paying back loans.  Hence, it is imperial that a company’s operation generates good cash flow to enable it to sustain the difficult time. Cash is king, I think it holds true for individual as well as a company.


Disclaimer: None of the strategies, stocks or information discussed or presented are financial or trading advice or recommendations. The author assumes no liability including for errors and omissions. Everything presented are the author’s ideas and opinions only.  The author may or may not at any time be holding securities discussed. Trade at your own risk.



Leave a Comment

Your email address will not be published. Required fields are marked *