“Always Invest In Cash Rich Companies”: Value Investing
A core principle of Value Invest is to makes sure you: always invest in a cash rich business.
When a business is cash rich It means it always has abundant funds left over after paying all of its debts and expenses.
It also means that its assets are liquid enough to be called upon Should they be needed as an extra source of cash.
So more cash simply means more liquidity.
That’s exactly what you want to look for as a value investor, and you should always make a point of investing in companies that have a strong cash position. Because they’re the ones most likely to pay regular dividends to their shareholders.
At the same time these companies are less likely to find themselves so strapped for cash that they are unable to service their debt loads when revenues dip or recession hits.
However having a lot of cash is not always a good sign.
You must find out if the management is utilizing their business casual.
Warren Buffett once said when people talk about cash being King it’s not king if it just sits there and never does anything.
If the management can’t utilize their business assets it shows inefficiency in the company’s operations and that will be a red flag that you need to pay attention to.
And finally you’ll want to look for cash rich businesses with a long and uninterrupted history of dividend payments.
When companies pay dividends on a consistent basis they demonstrate stability and show a positive sign that after paying all expenses and debts they still have a lot of cash left to pay dividends, to you and other shareholders.
And you know that helps increase shareholder value.
And in some way contributes to a growth in their stocks perceived value.
So remember this principle to: make sure you’ll always invest in cash rich businesses.