Cash is fact, the rest is opin­ion and hope

Fol­low the money and avoid duds that go bust

Scottish Daily Mail - - CITY & FINANCE - Fi­nal part in a se­ries by fi­nance ex­pert Tim Steer By Tim Steer Tim Steer is au­thor of The Signs Were There, a book about spot­ting warn­ing signs in com­pa­nies.

Cash is fact. Ev­ery­thing else in a com­pany’s ac­counts is a mat­ter of opin­ion – well, al­most.

That’s the mantra small in­vestors should re­mem­ber when re­view­ing a com­pany’s fi­nan­cial state­ments be­fore de­cid­ing to in­clude its shares in their port­fo­lio.

But, sadly, it is a mantra so of­ten for­got­ten by many pro­fes­sional fund man­agers who in­vest mil­lions on be­half of oth­ers. Why else do so many of them get caught out when com­pa­nies go bust or fail to keep pay­ing div­i­dends?

It was par­tic­u­larly im­por­tant for a fund man­ager such as Neil Wood­ford when he used to run in­come funds.

But many of the com­pa­nies that he in­cluded in his flag­ship Wood­ford Eq­uity In­come fund, which is now be­ing wound up, were quite the op­po­site of cash-gen­er­at­ing, in that they were small and re­quired cash to grow.

No won­der this fund, and in­deed oth­ers run by Wood­ford’s pro­tege Mark Bar­nett at In­vesco Per­pet­ual, were omit­ted from the im­por­tant UK Eq­uity In­come sec­tor of funds com­piled by in­dus­try ex­perts at Morn­ingstar.

The warn­ing signs of trou­bles ahead for th­ese so-called ‘in­come funds’ were al­ready there for those who looked. Cash is king be­cause com­pa­nies don’t go bust if they have it. It is an easy num­ber to check and ver­ify. You just count it.

Of course there are the rare oc­ca­sions when it is fic­tion, as at for­mer Us vice-pres­i­dent Dick Cheney’s favourite Repub­li­can cor­po­rate donor, En­ron. Patis­serie Va­lerie is an­other, as it did not have the £29m it claimed. Car­il­lion, which re­ceived enor­mous amounts of public money, un­der­stated its bor­row­ings by per­haps as much as £500m in its ac­counts.

But putting th­ese shenani­gans aside, cash is the most be­liev­able num­ber in a com­pany’s ac­counts, and if a busi­ness is gen­er­at­ing it in spades so much the bet­ter. The shares will go up.

all other numbers in a com­pany’s ac­counts are a func­tion of es­ti­mates made by direc­tors and au­dited by an ac­coun­tancy firm, of­ten af­ter re­ceiv­ing no more than man­age­ment as­sur­ances that they are bona fide. They are mat­ters of opin­ion and there­fore need to be treated with cau­tion.

In so many com­pany dis­as­ters th­ese days it is the es­ti­mates and judg­ments that are to­tally un­rea­son­able, and for those with a smat­ter­ing of fi­nan­cial knowl­edge they are easy to spot.

as I pointed out last week, you should think of a com­pany’s an­nual re­port as an ice­berg.

Just as an ice­berg shows you only so much of it­self above the water­line – a fact that was for­got­ten by those at the helm of the Ti­tanic – a com­pany only re­veals so much of it­self in its an­nual re­port, as of course it does not want its com­peti­tors to know ev­ery­thing.

BUT if there is some­thing in a com­pany’s fi­nan­cial state­ments that both­ers you then you can be sure that just as some 90pc of the ice in an ice­berg is be­low the water­line, there will be other trou­ble­some things be­low the metaphor­i­cal water­line in a com­pany’s an­nual re­port.

To prove my point about cash, take Games Work­shop, the fan­tasy war gam­ing com­pany es­tab­lished by stroppy young men dur­ing the Thatcher years af­ter open­ing up in 1978 in ham­mer­smith, west Lon­don. It is one of my all-time favourite com­pa­nies. Games Work­shop has grown like a trif­fid on a com­post heap as it pur­sues world dom­i­na­tion in wargam­ing, and is now worth nearly £2bn. It even still man­u­fac­tures in the UK.

Its shares have sky-rock­eted re­cently as in­vestors have warmed to the cash-gen­er­at­ing at­trac­tions of its busi­ness.

You see, Games Work­shop pays out all its sur­plus cash in div­i­dends to its share­hold­ers, and you don’t have to wait long for them.

Last year alone it paid out div­i­dends five times.

Nor­mally com­pa­nies that pay div­i­dends – and only some do – pay out cash twice each year.

Who would be­lieve that a fan­tasy war gam­ing com­pany that started out from a grotty re­tail site would now be pay­ing out div­i­dends of £50m each year. and a re­tailer at that.

The list of ca­su­al­ties on the high street in 2019 is a long one, and in­cludes Bon­marche, Deben­hams, Karen Millen and LK Ben­nett be­cause trad­ing is tough out there and th­ese re­tail­ers failed to gen­er­ate cash.

Games Work­shop does. It thrives and is a re­minder to us all as to what is best in com­pa­nies.

Cash is fact.

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