Ive never been the biggest fan of so-called efficient balance sheets. Too often this simply amounts to loading the balance sheet with debt to turn a poor return on assets into a decent return on equity disguising a humdrum business as something better than it is.
Furthermore, whizzy efficient balance sheets often implode when hard times hit, sucking the value out of shareholders equity, as happened in many cases during the 2008/9 financial crisis.
No, give me a cash-rich company any day one that can make me a good return on my investment without leverage. Sure, cash sitting on a balance sheet may be relatively unproductive for much of the time, but it provides a buffer during periods of stress, as well as giving financial flexibility; for example, to cherry-pick assets at knock-down prices from companies whose efficient balance sheets have got them into trouble!
FTSE 100 tech giant ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) has no debt, and is swimming in cash. At the last reckoning, the chip designer had 922m of spare change. To put that into some perspective for you, the cash figure is not far short of the total operating profit made by the company over the last five years.
ARM has a market-leading position and high margins. With costs increasing at a slower rate than revenue, profits have been rising strongly and excess cash has been rapidly accumulating on the balance sheet. Analysts expect no let-up in the companys growth in the foreseeable future.
Of course, a business such as ARM doesnt come cheap. The 12-month forward price-to-earnings (P/E) ratio is currently 33. However, thats on the value side of ARMs historical rating level; and the P/E is even cheaper 31 if we adjust for the surplus cash.
Iconic British fashion house Burberry (LSE: BRBY) is another rare FTSE 100 firm with net cash on its balance sheet. Burberrys cash pile isnt as big as ARMs and the company also makes use of bank overdrafts. Nevertheless, net cash is rising at a good clip up to 552m from 403m a year ago.
However, we should note that Burberry has sizeable lease commitments, like many retailers with substantial bricks-and-mortar estates. These lease commitments can be viewed as off-balance-sheet debt, so I wouldnt be inclined to adjust Burberrys P/E for the cash on the balance sheet. Nevertheless, the vanilla 12-month forward P/E of 20 represents decent value for a business with a record of strong earnings growth, and the prospect of more to come.
Online fast fashion firm Boohoo (LSE: BOO) is a smaller company than ARM and Burberry, being listed on Londons junior AIM market (since March 2014). Despite being a young growth company, requiring hefty expansion and brand investment, Boohoo has maintained (actually slightly increased) a net cash position of over 50m since its flotation.
Investors got over-excited when Boohoo came to the market and the shares traded at silly levels for a while. However, sanity has prevailed and the company currently trades on a 12-month forward P/E of around 25, which falls to 20 if adjusted for the cash. Either way, Boohoo looks an attractive investment, because forecast earnings growth is higher than both the lower and upper P/E figures, indicating good value for money.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings and Burberry. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.