Barclays Plc’s Greatest Weaknesses

When I think of banking company Barclays (LSE: BARC) (NYSE: BCS.US), two factors jump out at me as the firm’s greatest weaknesses and top the list of what makes the company less attractive as an investment proposition.

1) Lack of earnings’ visibility

Modern banks like Barclays earn money in ways I can’t even imagine. Sometimes, when the truth comes out, as it has in one scandal after another in recent years, it leaves me wishing banks had never conceived those dodgy earnings’ streams in the first place.

barclaysBanks have moved a long way from the basic banking business model of yesteryear. The volatile blend of esoteric business practices, high gearing and accounts that look like a Harry Potter training manual in the dark arts, make earnings hard to predict for investors like me. That makes the company uninvestable in my book, unless there’s a very big discount to net-tangible-asset value and we are at the ‘right’ point in the general macro-economic cycle. That’s not now, in my view.

2) Poor cash performance

One way to judge the effectiveness of a business model is to follow the cash. Just about every cash measure in Barclays’ financial record seems to indicate a company that has been struggling:

Year to December 2009 2010 2011 2012 2013
Cash at bank (£m) 81,483 97,630 106,894 86,191 45,687
Net cash from   operations (£m) 41,844 18,686 29,079 (13,823) (25,174)
Net cash from   investing (£m) 11,888 (5,627) (1,912) (7,097) (22,645)
Net   increase/decrease in cash (£m) 49,831 17,060 18,273 (27,873) (41,711)

Barclays is engaged in root and branch reform of its business practices and a de-leveraging of its operations. Just like a retail investor who unwinds a massively geared spread-betting account, the result looks like being diminished capital.

Barclays seems set to emerge as a leaner, meaner and … smaller business going forward, which puts yet another question mark over the wisdom of an investment in Barclays now.

What now?

To me, banks like Barclays are less attractive than they were a few years ago, around 2009.

Banks can be such complex beasts to analyse that it’s hard to ensure that we are buying good value.

A good starting point is to study a new report released by the Fool's senior investment analyst called "The Motley Fool's Guide to Investing in Banks."

The report looks at key value and performance indicators for banking businesses. If you think the sector is worth running your slide rule over, I urge you to look at the six ratios our top analyst applies to the five big banks listed on the London market. If you are investing in banks, you need to know this. Click here.

Kevin does not hold shares in Barclays.