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Cash flow: Kingdoms of cash

Readers will no doubt have heard the phrase “cash is king”.

It’s true. Cash is a royal asset: a liquid asset that pretty much determines how successfully a company can campaign for a viable niche or a dominant market share.

Each year we like to remind readers that cash flow is the very life blood of a business.

Without reliable cash flow or sufficient cash pile on hand a business – especially one in an intensive growth phase – will inevitably run into problems.

Take a cold, hard look

Currently – when reported earnings can take various forms – it’s critical investors are able to determine the cash earnings potential of a company.

The more profits earned in cash the better the quality of earnings. Maybe next year we can even convince our statisticians – McGregor-BFA – to calculate a ratio that shows cash earnings against reported earnings.

What do you say, Professor Brummer?

This year’s cash flow table suggests life assurance companies got their acts together in bringing through operational cash flows.

Old Mutual, Sanlam and Metropolitan Life all showed significant increases in cash flow in 2009 – a rather reassuring development considering the fallout from financial market crisis in 2008 is still very much apparent.

Interestingly, the table shows Old Mutual generated more cash flow than mining giants BHP Billiton and Anglo American combined.

Gold Miner Harmony, industrial conglomerate Remgro and SABMiller also caught the eye with strong surges in cash flow.

Surging ahead

The biggest growth in cash flow over one year came from building supplies specialist Buildmax, which grew cash flow from R8m to R300m.

Over five years Buildmax has increased cash flow by a whopping 130% – which probably explains the upward shift in its share price for this rejuvenated company.

Casting an eye over longer term achievements it’s reassuring to see so many blue chips with solid increases in cash flow over five years.

Some standout performers include be Old Mutual (89%), MTN (51%) and Remgro (52%).

How Remgro (now with VenFin onboard) will fare sans the benefit of British American Tobacco’s dividend flows remains to be seen.

Other commendable cash flow performances over five years would include Mercantile Bank (137%), industrial equipment supplier Bell (80%), construction group Wilson Bayly Holmes - Ovcon (61%) and emerging banking group Capitec Bank (49%).

Mining companies also featured prominently: Petmin (89%), Assore (75%), Harmony (88%) and debt-laden Metorex (137%).

Empowerment conglomerate HCI has more than doubled cash flows over five years, which is fortunate considering the group (like Metorex) carries a fair whack of debt.

Technology group Gijima AST – which doesn’t receive much market attention these days – showed a 300% increase in cash flows over five years.

Another interesting exercise to test a company’s liquidity is cash flow against debt.

Top ranking that table is Grand Parade Investments (GPI), an understandable ranking when considering the gaming-aligned empowerment had no meaningful debt and plenty cash flow (from its underlying investments in casinos).

Cash flush investment group Remgro has never really carried any meaningful debt (at least for the past two decades), while Mobile – as the holding company of Trencor – carries no debt on its balance sheet.

But some “operational companies” do impress.

Tote group Phumelela’s cash flow covers its debt by almost 70 times, while small media group AME holds a cover of 20 times.

Shareholders in Truworths (16 times), private education group AdvTech (nine times), Oceana (6.67 ) and Rainbow Chicken (5.47) can also feel reassured.

For those investors who watch for attractive dividend yields at small cap counters there are more than a handful of promising situations highlighted on the cash flow to debt table.

Those include TeleMasters (8.22 times), Compu-Clearing (6.47), Kagiso Media (6.3), ISA Holdings (4.7), Bowler Metcalf (4.25), Rex Trueform (3.38) and Datacentrix (3.22).

'Nuff said

Readers don’t get the benefit of seeing some of the bottom rungs of this important table (ie, those listings well off the top 200).

Some “tight” positions were in evidence at Pinnacle Point, SA French, African Brick, IFCA Technologies, Skinwell, IFA and Super Group.

No need to say much more.

Our third “cash” table depicts cash or near cash holdings.

Obviously, the top rungs are filled with banks and financial services companies that – for obvious reasons – need to retain a huge spread of available capital.

The JSE Ltd, the operator of SA’s only stock market, holds around R16bn in cash – large in relation to its market capitalisation but necessary in terms of guaranteeing trades on the bourse.

Emerging market banks Abil and Capitec hold R13.5bn and R3.7bn in cash or near cash respectively.

Richemont holds R27bn in cash – underlining CEO Johann Rupert’s now legendary bear view.

Only SABMiller – which has been on a massive acquisition drive since listing in London – looks “light” on cash, with a holding of R4.5bn.

That’s less than much smaller entities, such as Afgri, Steinhoff, Aveng and Imperial, have on their balance sheets.

 - Finweek

To view the Cash Flow Table, click here
To view the Cash Flow vs Debt Table, click here
 
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