The most resilient FTSE shares to survive the crisis

Sam Benstead looks at a key ratio that professional investors use to assess the financial resilience of listed companies

Economists are at loggerheads over the outlook for the British economy – but it is not a normal debate. Instead of bickering over whether growth will be 2pc or 2.5pc in a year, they are clashing over whether output will drop by 15pc or 35pc in a single quarter. What is clear is that the shock to the economy, and to the businesses that drive it, will be historic.

Investing in this environment is hazardous. Companies face unprecedented shocks to demand and to their ability to supply goods and services. Savvy investors must painstakingly study a company to determine how ready it is for potentially deadly speed bumps.

One tool investors have to assess the financial strength of a company is the “quick ratio”, which measures a firm’s ability to pay its short-term debts with available cash. Whether a company can pay forthcoming bills is a fundamental thing investors should know before they buy shares during a recession.

“Companies that have a good cash cushion during the current crisis can avoid issuing new shares to pay off debt. These companies can also use cash reserves to spend on capturing market share from financially weaker rivals and come out of the crisis stronger,” said Charles Incledon of Bowmore Asset Management.

He said companies with high quick ratios would come out of the blocks faster once the economy got going again as they could ramp up investment faster than their rivals.

Calculations from Bowmore indicate that the average quick ratio for FTSE 100 companies is now 0.8, compared with 1.01 in 2009. A quick ratio of greater than one suggests that a company has more than enough cash to cover debts due within the next 12 months.

This means Britain’s largest businesses are on average less prepared than at the start of the last economic crisis.

But Mr Incledon said there were still plenty of large British companies with lots of cash on hand, including miners such as Fresnillo, BHP and Antofagasta, as well as Ocado, the online grocer, and Burberry and Next, the fashion groups. Some of the lowestscoring companies by this measure are cigarette maker British American Tobacco, Carnival, the cruise operator, and Glencore, the miner.

Nevertheless, the quick ratio should not be used in isolation when looking for investment opportunities and can be a crude indicator of financial health, according to Joe Healey of The Share Centre, an investment shop.

He said timing was important because the shortterm outgoings of a business could be misleading.

“For example, a supermarket may have placed a large order, which would depress the quick ratio in the short term. This highlights why investors should do thorough analysis of the factors behind a high or low score,” he said.

He encouraged investors to use a range of tools to analyse a business, such as looking at how much cash it generates, known as the cash flow.

He noted that while Ocado’s cash balance compared with its liabilities was higher than that of other supermarkets, which explains its high quick ratio, it has high levels of long-term debt and is currently loss-making.

“Ocado is not expected to be profitable this year, which highlights the importance of using a combination of financial metrics,” he said.

The quick ratio should also be compared with the share price of a company to assess whether it is an attractive investment opportunity, according to Mr Incledon. If it is widely thought that a company might struggle to pay forthcoming debts and is facing severe challenges, this is likely to be reflected in the share price.

Carnival’s share price, for example, has fallen by 65pc this year, which suggests that investors are pricing in the impact of the economic lockdown and its vulnerable finances.