OMV Petrom (SNP.RO), Fondul Proprietatea (FP.RO) and Transgaz Medias (TGN.RO) are the companies with the largest cash reserves at the end of March, holding a total of RON2.37 billion. The five regional investment funds (SIFs) had RON480 million left in their accounts. A good portion of this liquidity will go to shareholders in the form of dividends, and the rest will be used for investments.
The liquidity of listed companies is an important indicator for investors, revealing how solid the business is and the company’s ability to generate cash.
“The fact that a company holds liquidity reserves can be an argument in its favor, but these reserves have to be within a certain interval so that the company can operate under the best conditions and use these resources for further development,” says Bogdan Gheorghe, analyst at Tradeville brokerage.
Petrom and Transgaz, which operate in the energy sector, have a significant capacity to generate cash, and are among the few companies listed on the Bucharest stock exchange that have conducted major investments in the last few years and paid substantial dividends to their shareholders.
Fondul Proprietatea and SIFs, which are financial investment companies, can get liquidity at any time by selling stakes in their portfolios.
In the other sectors, the companies boasting the most significant liquidity are pharmaceutical companies – Zentiva (SCD.RO), Biofarm (BCM.RO), Ropharma (RPH.RO) and Farmaceutica Remedia Deva (RMAH.RO).
The companies with the highest liquidity to capitalization are VAE Apcarom Buzau (APC.RO) and Casa de Bucovina (BCM.RO), where cash accounts for over 90% of capitalization. However, as important to the level of liquidity is how the company uses the money to its advantage.
A company that has a lot of cash available can conduct investments, which will be seen in long-term results or can pay out dividends, which increase the shares’ short-term attractiveness. Such a company can withstand the shocks of the financial markets better because it can use the cash to finance operations during the times when lending shrinks significantly.
On the other hand, companies that lack cash can run into problems and be forced to borrow in order to meet their day-to-day payment obligations (bills from suppliers, wages). When they no longer have cash and can no longer borrow, companies go insolvent, as was the case this year with Oltchim Ramnicu Valcea (OLT.RO) and COS Targoviste (COS.RO).
In order to get a clearer picture of a company’s liquidity, investors have to look not only at liquidity, but also at the performance of the company’s receivables, stocks and short-term debts. A company can at one point have low liquidity, but significant receivables to collect. If the deadline for collecting the receivables is extended, then problems can ensue.
Similarly, if current debts are very high, then a large portion of liquidity could be used to pay debts. A high level of liquidity does not guarantee a company’s health.
“Perhaps the most popular indicator of a company’s liquidity (its ability to cover current liabilities through liquid assets) is the acid-test ratio,” Bogdan Gheorghe says. This ratio is calculated by dividing cash + accounts receivable + short term debts by current liabilities. A ratio of less than 1 can indicate liquidity problems.
On the other hand, it is not in investors’ advantage for the company to keep large amounts of cash in its accounts for long periods of time. For instance aluminum manufacturer Alumil (ALU.RO) and drug maker Biofarm (BIO.RO) have held on to significant cash reserves since 2008, but their shares have recorded a modest performance in the last few years.
(English version by Daniela Stoican)