You can buy these companies for less than the company’s CASH, after paying off all liabilities

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Difficulty: Advanced

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Recap of Price-to-Book

Price-to-Book is the ratio between 1) the market cap of the company and 2) all assets minus all liabilities.

Overview of Price-to-(Cash minus all liabilities), or Price-to-CMAL for short

Price-to-CMAL is the ratio between 1) the market cap of the company and 2) cash balance minus all liabilities. You basically ignore all the non-cash assets. You can’t apply this ratio to all firms, as only some firms have more cash than all their liabilities.

Why should we care about companies with Price-to-CMAL of less than 1?

It’s a very attractive value proposition because cash, unlike other assets, should be worth exactly what it’s said to be worth on the balance sheet. Let’s say the company liquidates or is wound up. Your profit would be

• The difference between the surplus cash (after paying off liabilities) and the amount you paid.
• All non-cash assets (e.g. land, equipment)
• The amount you could sell the business operation for

That said, you shouldn’t buy stocks by just looking at one ratio.

Here are potential reasons why you’d still want to be careful while looking at Price-to-CMAL stocks:

• Business may be bleeding cash.
• Issues with management trustworthiness.
• Hidden or future liabilities.
• Long history of trading at Price-to-CMAL of less than 1.

List of CMAL<1 stocks in the article below

In Part Two of this article (to be published next week), we will be taking a deep look at into some of these stocks in hopes of finding something we would personally BUY!

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(Optional) Quick recap of Price-to-Book

What’s Book Value? The “Book” in the often used Price-to-Book ratio refers to Book Value. Book Value is known as Equity, and is equal to Assets minus Liabilities. You can think of it as assets leftover, after the company pays off everything it owes to creditors (creditors like banks, bondholders, suppliers).

Price-to-Book is the ratio between 1) the market cap of the company and 2) all assets minus all liabilities. If you divide both numerator and denominator by the no. of shares, the ratio is between 1) the share price of the company and 2) all assets per share minus all liabilities per share.

Side-note: It is possible for a company’s liabilities to be more than the firm’s assets. In that case, the company’s book value would be negative. Often times, stock monitoring websites wouldn’t show the price-to-book ratio for such companies.

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What does Price-to-Book not tell you?

Remember I said to think of book value as assets leftover, after the company pays off everything it owes to creditors?

Well, one major thing the Price-to-Book ratio doesn’t tell you is what kind of assets the company has or what these assets might be worth in reality.

Many assets can be worth more or less than what they are said to be worth on the financial statements. Sometimes, the value of assets in real life can be very different from what they are said to be worth on the balance sheet (the financial statement showing assets/liabilities). This may happen due to accounting policies. Continuing the above example, Company A owns a plot of land. They bought the land for $1 in 1990 but discovered in 2000 that it has gold buried in it. On the balance sheet, the land may still be valued at $1, especially if the company didn’t hire anyone to find out what the value of the gold is.

More worryingly, some assets can also be worth LESS in reality than what is reported on the balance sheet.

Except for cash. Cash is an asset that should be worth exactly what it is said to be worth on the balance sheet. At least for companies that have been properly audited. There are cases of financial fraud, where companies trick auditors into believing they had more cash than they did, but let’s leave that aside for now.

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Overview of what Price-to-CMAL is

What’s cash minus all liabilities (CMAL)? It’s pretty self-explanatory but we’ve shown it in the graphic below. Note that not all firms have more cash than their liabilities, so we’ve changed the name of the company to Company B. Just to be clear, the CMAL terminology is something we came up with ourselves, in case you try to find it online. We’re basically taking a stricter form of net-net working capital, which is a very established concept. See investopedia if you’re interested.

Price-to-CMAL is the ratio between 1) the market cap of the company and 2) cash balance minus all liabilities. You basically ignore all the non-cash assets. Naturally, Price-to-CMAL<1 is a stricter requirement than Price-to-Book <1.

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Why should we care about companies with Price-to-CMAL of less than 1?

Very compelling value proposition on the surface. Let’s say the company liquidates or is wound up. The cash balance can be used to pay back ALL liabilities and there’d still be surplus cash. Buying a company at Price-to-CMAL of less than 1 means that you’d be buying the company for LESS than that surplus cash.

So your profit would be…

• The difference between the surplus cash and the amount you paid. The lower the Price-to-CMAL ratio is, the wider the gap.
• Any non-cash assets (e.g. land, equipment)
• Amount you could sell the business operation for (depends on the present value of its future cash flows)

Of course, this kind of profit-taking is most likely if one party (like a Private Equity firm) buys out the entire company, probably at a premium to the current share price. If you bought a few shares, you’d be beholden to the management or the substantial shareholder to liquidate the company and realize value. Or, you would have to wait for the market to realize the same thing you’re realizing.

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Does it mean you should definitely buy stocks with Price-to-CMAL <1?

Here are potential reasons why you’d still want to be careful while looking at Price-to-CMAL <1 stocks:

• Business may be bleeding cash. If the operating business is losing money, then over time, the cash balance may fall below total liabilities.
• Issues with management trustworthiness. Untrustworthy management could seek to enrich themselves by paying themselves a huge salary or in some cases, by siphoning out the money through contracts with shell companies.
• Hidden or future liabilities. Perhaps there’s a lawsuit on the horizon.
• Long history of trading at Price-to-CMAL of less than 1. It’s possible that cheap stocks remain cheap for a long time without a catalyst. It doesn’t rule out the stock immediately, but you’d want to proceed with caution. The most important catalyst for such companies would be an increase in shareholdings by a substantial shareholder, especially an institutional fund.

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Here’s the list!

We have screened companies with a Price-to-CMAL of less than 1 and a market cap of more than US$100m. We have limited the selection to stock exchanges we are more familiar with (USA, Singapore, Hong Kong, Japan, countries in Western Europe).

Note! If you are looking to buy any of these companies, please do double-check the cash and total liabilities figures through the company’s latest results filing. Separately since the figures were pulled straight from Bloomberg, I’ve highlighted those that appear buggy to me in red.

In Part Two of this article (to be published next week), we will be taking a deep look at into some of these stocks in hopes of finding something we would personally BUY!

We have also included companies with a Price-to-CMAL of more than 1 but less than 1.5, for those who are interested. These have a market cap of over US$100m.

For our Singaporean readers, here’s a list of stocks with Price-to-CMAL below 1.5, although this time we don’t have any market cap minimum. One issue with low market-cap stocks is that they can often be illiquid, making it difficult for investors to enter or exit positions.

In Part 2, we take a deeper look at into some of these stocks in hopes of finding something we would personally BUY!