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Is Cash King or Pauper? How to Value Cash on the Books

November 07, 2012 | About:
The adage "cash is king" is not always true.

There are three scenarios for the valuation of cash on the books:

(1) Cash is valued at less than fair value.

(2) Cash is valued at its face value.

(3) Cash is worth more than its face value.

(1) Cash is valued at less than fair value

- Companies with a penchant for mergers and acquisitions and a patchy track record of failed investments

- Companies who have a history of "di-worsifiying"

- Companies who need to hold cash as short-term working capital, e.g. supermarket business

(2) Cash is valued at its face value

- Mature businesses which pay out a significant portion of earnings as dividends to shareholders every year

(3) Cash is worth more than its face value

In his book, "Value Investing," Martin Whitman describes four ways in which companies create value or wealth: (i) earnings (ii) free cash flow (iii) resource conversion (iv) access to capital markets. Whitman believes in investing in companies with access to capital markets on a super-attractive basis. Such companies can issue overvalued stock to acquire companies in bull markets, repurchase shares cheap in bear markets, and borrow at low interest rates in depressed credit markets.

Companies with large excess cash balances and a strong financial position belong to this category of firms who can access capital markets on a super-attractive basis.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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