Company borrowings have become a big concern for many shareholders lately, with cash flows and balance sheets under pressure in a number of sectors, particularly in the natural resources area. We’ve seen many companies cutting their dividends, some tapping shareholders for extra funds, and several going under completely or currently teetering on the brink.
Could buying shares in cash-rich companies be a cure for investors fretting about debt? Today, I’m looking at three cash kings: FTSE 100 tech champion ARM (LSE: ARM), fast fashion etailer Boohoo (LSE: BOO) and online video platform Blinkx (LSE: BLNX).
ARM
ARM is simply one of the best businesses around. Ten years ago the company generated revenue of £232m, posted earnings per share (EPS) of 4.3p and had surplus cash on the balance sheet of £182m. Today, those numbers stand at £1,489m, 30.2p and £1,006m. Over the same period, the share price has risen from 132p to a current 950p.
Few companies have delivered a comparable record, and fewer still have done so without the leverage of debt. It’s rare indeed for such growth to come entirely from cash flows generated by the business itself. ARM has invested in the R&D necessary to deliver this growth, bought back its own shares to minimise dilution for existing shareholders, paid a dividend that has increased more than 10-fold, and still had cash left over at the end of each year to add to an ever-increasing kitty of ‘loose change’.
Ten years ago ARM was trading on a price-to-earnings (P/E) ratio of 30.7. Today, the P/E is marginally higher at 31.5. Can the company deliver the same kind of performance in the next 10 years as it delivered over the last 10? With expanding market opportunities for its technologies, including the Internet of Things, I wouldn’t bet against it. Indeed, I rate the shares a strong buy at current levels.
Boohoo
Boohoo is a relative newcomer to the stock market, having floated on AIM in March 2014. The company raised gross proceeds of £300m at 50p a share, but after repaying convertible loan notes was left with net proceeds of £46m to add to existing cash of £8m.
As a young, fast-growing business — revenue up 40% and EPS up 48% last year — Boohoo is making substantial investments in infrastructure and marketing. Annual results last week showed £13.6m of capital expenditure and £19.9m of marketing expenditure. Despite these substantial investments, Boohoo ended the year with a £4m increase in its cash balance to £58m. Again, we have a company funding impressive growth entirely from the cash flows of the business.
Boohoo was arguably overvalued at its flotation, but with the shares currently trading at 48p on a forward P/E of 33.5, the company looks a good buy to me, given the strength of its balance sheet and growth prospects.
Blinkx
Blinkx has an AIM-market listing and cash on the balance sheet in common with Boohoo, but there the similarities end. The following table shows the gross proceeds raised by Blinkx on its 2007 flotation and in subsequent share placings.
| Year | Proceeds | Placing price |
|---|---|---|
| 2007 | £25m | 45p |
| 2009 | £5m | 18p |
| 2010 | £19.5m | 84p |
| 2011 | £9.4m | 134p |
| 2013 | £39m | 195p |
Blinkx has raised a total of almost £100m gross — call it £85m net — which at current exchange rates translates into around $125m. In a trading update earlier this month the company gave a cash balance for 31 March of $76m. In other words, all of the cash on Blinkx’s balance sheet has been provided by investors, rather than generated by the business. In fact, the company has consumed about $50m of investors’ cash since flotation.
The shares are currently trading below any previous placing price — at 17p — and I see Blinkx as a company to avoid, until it can demonstrate that its business is capable of generating cash sustainably.