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Cash and Short Term Investments
The world runs on cash and stocks are no different.
The first part of the balance sheet under Assets is Cash and Short Term Investments. If you click on the little blue arrow a drop-down menu will show you that this section is broken into Cash & Equivalents and Short Term Investments.
Cash & Equivalents is typically cash in the bank (very rarely will it actually be giant stacks of cash a la Scarface) as well as highly liquid assets (assets that can be converted to cash almost immediately). Short Term Investments can be things like treasury bills. As you can see Research in Motion has a pretty decent amount of the green stuff; $1,518,210,000 to be exact (remember, those numbers are in millions).
I am going to refer to the total figure of “Cash and Short Term Investments” of $1.5 billion simply as “Cash” from here on out.
Cash or No Cash? That is the question.
Having a lot of cash can be a blessing and a curse at the same time – mostly depending on the management (more on this soon). If a company has too much cash it can mean that instead of spending the cash on useful things such as investing in growth or fixing those broken toilets to improve company morale, the management is simply enjoying building miniature cities out of blocks of cash (a.k.a. hoarding); although at least it will be able to pay off outstanding debts (more on that later as well) which should definitely make you as merry as a schoolgirl.
On the other hand if a company has no cash it can mean that it has utilized it all on useful investments, but if hard times hit and revenues decline, the company will have a harder time paying off its debts than Paris Hilton would have turning down sex.
So, how can you determine whether or not management is spending (or lack thereof) its cash in the most intelligent manner? Read and valuate the company’s income statement.
If a company is able to grow revenues while decreasing expenses you know that management is doing a damn good job, thus it would be logical to assume that they know what the hell they are doing with their cash and investments. On the other hand, if revenues are growing while profits are falling you can assume that management is spending more time snorting cocaine than keeping an eye out on being fiscally responsible.
How much cash is enough?
Sure, $1.5 billion in cash may seem like more money than there are flies in Africa but we don’t really have any way of knowing whether or not that amount of money is below average, average or above average…until now.
The first thing I like to do when looking at Cash and Short Term Investments is to make sure that there is enough of it to pay off a good chunk of the company’s liabilities (if not all). Scroll down the balance sheet to find that RIMM has almost enough dough to pay off 70% of its liabilities (1,518.21 divided by 2,227.24 multiplied by 100). Knowing that your company will be able to pay off most of what it owes (a.k.a. liabilities) in case of imminent doom is not a bad safety net to have.
You will find that some companies have enough cash to pay off their liabilities twice over (if not more)…I LOVE companies like that (sorry RIMM) – and you should too!
It’s also good to see that cash is growing or at least isn’t horribly decreasing. As we see with RIMM, Cash and Short Term Investments have been growing steadily up to 2008 with a slight decrease in 2009 – of course this is understandable considering that we were in the midst of the “worst economic climate since the Great Depression” where operating costs tend to be significantly higher (another reason why having a lot of cash is a good thing).
Comparisons, comparisons
Another way of determining the health of your stock’s cash holdings is by comparing it to its peers.
The first thing you want to do is to take the Cash and Short Term Investments figure and divide it into RIMM’s market capitalization (which I taught you how to do in the Income Statement guide) then multiply it by 100 (to get a percentage).
As of February 11, 2010, RIMM’s market capitalization (price per share multiplied by shares outstanding) was $38.52 billion. Divide $1.51 billion into that to get 3.9%. So, what does that mean? It means that RIMM can buy back 3.9% of itself with all of its cash. If RIMM’s price per share were to suddenly get cut in half, RIMM would be able to purchase 7.9% of itself.
At first glance, 3.9% seems as low of a figure as the number of years Kevin Federline’s career will continue to exist but we will never be able to know the full truth without comparing Research in Motion to its peers, say Apple and Palm.
If we take a look at Apple’s balance sheet we see that it has $23.464 billion in cash (not too shabby) with a market capitalization of $180.15 billion – meaning it can buy out 13% of itself (again Apple seems to kick RIMM square in the crotch).
Palm on the other hand has Cash and Short Term Investments of 255.13 million with a market capitalization of $1.61 billion, thus being able to buy out almost 16% of itself – effectively leaving Apple and Research in Motion in the dust. Of course when you realize that Palm has about one sixth the cash of RIMM and one one-hundredth the cash of Apple, you suddenly cease to care about Palm’s existence.
Accounts Receivable
Under “Cash and Short Term Investments” you will see “Total Receivables” which can be divided into “Accounts Receivable” and “Other Receivables”. Do not be afraid of these seemingly terrifying sounding titles for they mean just one thing: money that is owed to you (or to your company).
It’s basically the same way credit cards work, like the time you bought that big screen plasma TV along with all the accessories and then got smacked with a bill the size of New Jersey’s budget deficit – you got the goods, now you have to pay them off. Think of them like one big fat “IOU”.
Out of all the receivables, Accounts Receivables are the ones you really want to look out for; it is the money owed to you from various accounts, specifically frequent or special customers – typically where the bulk of revenues come from.
So, then you get to thinking with your incredible mind: when someone owes you money, it’s just as good as having the real thing! Meaning, a company that has loads of Accounts Receivables is rolling in the dough…right? No, not exactly.
Having high receivables can mean a few things, good and bad. First, high receivables can mean that your goods or services are in high demand and a lot of people are purchasing them. On the other hand, it can also mean that the company is doing a poor job of collecting its money.
If receivables are growing too slowly it either means that the company isn’t taking in enough money or is collecting the money owed to them extremely efficiently. Again, your best bet of knowing how efficient management is being is by valuating the company’s income statement.
Also, it’s good to remember that not every single account will end up paying off what it owes. There are always random (and extremely cruel) events that can transpire which will prevent you from getting paid, such as your customers going bankrupt or a tornado ripping through their main headquarters. Or your Money Collecting Department may simply be spending too much time putting dollar bills into strippers’ thongs instead of actually doing their jobs.
Valuating Accounts Receivable
We see that Research in Motion’s Receivables are growing quite splendidly with a spanking 82% increase since the year before and a 104% increase the year before that. So now you’re as giddy as a schoolgirl…then you suddenly remember what I said about having Accounts Receivables grow too quickly.
So, how do we know what is a healthy growth rate for Receivables? Compare them to revenues…back to the income statement!
As we determined in the income statement guide, RIM’s revenue growth for the last year was 84% and 98% for the year before – meaning that the growth of the money that is owed to the company is very near equal to the real money coming in.
Your receivables can’t be looking much better than this!
Inventory
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