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MARKET COMMENT
By
Corporate accounts can be a minefield. Although the chairman may trumpet improvements in profits at the front of an annual report, the funny numbers at the back may hide a multitude of sins. However, an easy way of minimising the chances of bookkeeping and share price trouble is to investigate the net cash (or debt) situation. The net cash/debt figure is usually found in one of the accounting notes and represents the company's total cash (and equivalents) less all bank debt owed at the balance sheet date. There are many reasons why investors can count on this entry and the firms that enjoy a healthy positive balance. For starters, cash is difficult to fudge, as there's little accounting opinion involved in totting up all the money in -- and owed to -- the bank. In addition, a healthy bank balance is often a result of a cash generative operation, or perhaps highlights a boardroom full of prudent and careful directors. And of course, plenty of cash provides shareholder comfort. Unlike a nervous lender, a cash pile will not demand money during a bad patch or cause anybody to go bust. Given their operational strength, it's maybe not so surprising to discover most large businesses operate with net debt. Excluding banks and insurers (whose accounts presentations differ from the traditional trading format), just six FTSE 100 firms reported a net cash balance within their latest year annual report. By far the largest blue-chip hoard belongs to Cable & Wireless (LSE: CW.). At the last count, it stood at £1,430m to represent over half of C&W's current market value. But venture further down the corporate ladder and it's more likely a net cash position will be found. Within the FTSE 250, 46 firms reported net cash in their last annual report, while 100 of the 337 small-cap index constituents were also cash positive. And within the Alternative Investment Market, 392 of the junior bourse's 812 members enjoyed a net cash situation. Though smaller firms inherently carry added risks, a substantial cash backing will restrict the disappointment should problems occur.