Bowmore says this is an important metric during periods of economic disruption and lower sales revenues. Companies with a high number of days’ cash on hand will be able to operate for longer without taking on additional debt or having to raise further funds from shareholders and investors.
Although the ‘days cash on hand’ metric assesses a company’s ability to cover its operating expenses using its cash reserves, it does not include any debt obligations. Here, more troubled businesses, may have to negotiate a rescheduling of debts with lenders or raise funds at higher interest rates than before the outbreak.
However, the debt burden for UK listed companies has remained relatively stable in recent years, suggesting companies will not be facing higher interest payments than at present. Debts as a percentage of shareholders’ equity for UK plc was 71% in 2018/19, the same as the year before and significantly lower than in the aftermath of the financial crisis in 2008/09 (83%) **.
Bowmore adds that having a high number of days cash on hand will actually enable businesses to capitalise on growth opportunities that may present themselves during the rebound. These funds could, for example, help finance the acquisition of a fundamentally healthy rival that needs assistance or expand production and employee numbers.
Bowmore adds the strength of average FTSE100 cash reserves is another argument against panic selling equities after a severe correction in the market.
Charles Incledon, Client Director at Bowmore, says: “Whilst conditions for businesses are arguably the most challenging we have seen for a generation, the recent sell offs have not turned good companies into bad companies overnight. In addition, FTSE 100 companies are far better positioned to face the coronavirus crisis than they would have been a decade ago from both a financial perspective, but also operational as technological advancements mean the vast majority of us can work from home”
“A high number of average days cash on hand for the FTSE100 is a sign the largest UK companies have the financial resource to cope with the economic disruption coronavirus is causing. The ability to fund over a year and a half of operations without any new sales gives businesses breathing room in terms of how they manage their expenditure.”
“We must remember that this is without taking into consideration the significant levels of government support that has been announced. This strengthens their positions further as for many, their largest expenditure is salaries, and with these being covered by the government, their cash reserves are likely to remain at similar levels once we are out the other side of this”
“This period has forced all companies to re-evaluate how their businesses operate, unveiling aspects of business which actually can work just as well from remote locations (i.e. at home). We fully expect this to fundamentally change the way companies approach their day to day operations. With many having identified significant cost savings and increased efficiencies as a result of this virus. Which in turn, will eventually be reflected in share prices.”
“The take away for investors is that FTSE100 companies on average are in good shape to weather the economic storm.”
*Based on latest financial results
**Link Asset Services Debt Monitor 2019
