Every investor’s goal is to find undervalued investment and then sell it when it reaches fair value. To find the fair value of a common stock, we need to predict the profits generated by the stock over a period of time. This prediction may not be accurate. After all, nobody can know the future with 100% certainty. When things unexpectedly turn ugly, investors need to guard themselves against capital losses. The way to reduce this risk is by investing in companies with positive net cash.
Net Cash is the difference between cash & short-term investments with the amount of long term debt. We can find this three items on the balance sheet of every company. A lot of times, one can include long term investment as cash. Long term investment can include instruments such as 18 month Certificate of Deposit or treasury bond maturing one year or more. To be on the safe side, let us consider just cash and short-term investments.
You might wonder why we do not subtract short-term liabilities such as accounts payable. Good question. The reason is that accounts payable is normally used to buy inventories. Some of the revenue is also tied up in accounts receivable. In...
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