Cash Per Share – TDR University
The TDR Three Key Takeaways:
1. Cash Per Share Overview: This metric shows a company’s liquidity by its net cash per share, aiding in assessing its ability to handle immediate financial needs and comparing it against industry peers.
2. Comparative Analysis: It serves as a benchmark for evaluating a company’s liquidity relative to others in the same industry, informing investment and strategic decisions.
3. Limitations and Upcoming Insights: Despite its usefulness, the metric doesn’t account for liabilities or external financial factors. TDR will soon release names of tech companies whose market capitalization is lower than their net cash, highlighting unique investment opportunities.
At TDR, we are introducing a series of blog posts aimed at explaining key financial metrics and ratios commonly encountered in our financial analyses, articles, or research reports. Earlier this week we shared about Book Value Per Share and Tangible Book Value Per Share, Tangible Liquidation Value % Ratio. This metric, is a related measure to measure liquidity of a company. Our objective is to help you understand these terms and provide our readers with clear, comprehensive explanations.
Understanding Cash Per Share
Cash Per Share is crucial for evaluating a company’s liquidity. It reflects the immediate financial resources available to a company per share. But, there are limitations, it does not consider short or longer term debts. This post aims to detail the calculation of Net Cash Per Share, its uses in investment analysis, and its limitations.
To calculate Cash Per Share, divide the company’s total cash and equivalents by its total shares outstanding. This provides the net cash value per share, indicating the company’s liquidity on this basis.
Benefits of Cash Per Share
Despite its simplicity, Cash Per Share is valuable. It helps investors and analysts assess a company’s liquidity and ability to meet short-term obligations. It also allows for industry comparison, offering a benchmark to measure a company’s financial health against its peers. It is a quick look calculation that in seconds can give you insight into the company’s liquidity.
Limitations of Cash Per Share
Cash Per Share has limitations. It doesn’t capture the full financial picture, omitting liabilities and future cash flows. It also ignores external factors and broader market conditions. The metric’s relevance may vary by industry and market conditions. Also, it is not available easily, you need to transfer data into a spreadsheet and calculate it yourself.
My Analyst’s Perspective
The concept is straightforward, but it’s important to note that Cash Per Share doesn’t account for current liabilities. It’s possible for a company to have substantial cash reserves while also carrying significant debt, similar to an individual with a high bank balance and substantial credit card debt. However, a high net cash position can make a company an attractive takeover target, often at a premium. In some cases, companies hold more cash than their market capitalization, theoretically allowing an entity to acquire the company using its own cash reserves. I’ve identified several such companies, including some in the tech sector, and I plan to share these findings with our readers next month.