“Profits are an Opinion, Cash is the fact”, this statement by Alfred Rappaport sounds quite impactful in today’s time where generating cash has become an integral goal for various companies.
In this article, we are going to decipher the relevance of cash for a company and pick up the “Top 5 cash-generating companies in India”.
At the outset, let’s start with understanding the significance of an adequate cash pile.
Why is having Cash important for a business?
During a time of crisis, cash has always been a savior. The reason being that it is the most liquid asset. Monitoring cash flow is an important component of keeping a company functioning smoothly. This is why cash flow is more essential than profit.
The reason why we should not only focus on profit is that the companies do not receive revenue immediately after-sales. You may not receive the payment for months but still, you have to pay off your liabilities.
Besides, apart from meeting the obligations to pay the bills and salaries, Cash is also important for promptly tapping on expansion opportunities, negotiating and availing credit facilities, dealing with emergencies, etc.
How to measure the liquidity of an organization?
First, we need to understand what liquidity is? Liquidity is basically how quickly the assets can be converted into cash. It means how efficiently the company is able to meet its working capital requirements using its current assets.
In order to measure the liquidity of an organization, various metrics can be used. Following are some of them:
It is the simplest ratio to assess the liquidity of the company. The formula to calculate is to divide the Current Assets by Current Liabilities. If it is greater than 1, it can be said that the company will be able to meet its short-term obligations. A current ratio of less than 1 indicates that the company does not have sufficient cash to meet its current liabilities which may lead to illiquidity.
Cash reserves are relevant for the business as the company can use these funds when any unexpected cost comes up. The main agenda is the ability to run the business in times of crisis like when the client payments are delayed or economic slowdown.
The actual cash balance provides liquidity to meet the financial obligations of the company. The balance is required so as to access the funds as and when the need arises. To acquire another business or to grab an opportunity, one needs to have positive cash flows as they cannot rely on the line of credit in this competitive market.
How to identify Cash Cow companies?
The first criterion is the current ratio should ideally be greater than 2. This means that the company has twice the current assets to meet its short-term obligations. Plus, the cash reserves and the actual cash balance should be sufficiently high.
Now you can use a good screener like Ticker to filter out the top 5 cash-generating companies in India using the above criteria (plus some other good metrics for better screening) -
The query used here is: Reserves TTM>25000 and Cash Bank Y1 >3000 and ROCE Y1>25 and ROE Y1> 20 and Current Ratio Y1>2
(Source: Ticker Screener)
Top Cash Cows in India
Here’s the list of top picks from the companies screened:
Hindustan Unilever Ltd.
HUL is one of the most prominent companies in the household and personal care products. It is the subsidiary company of Unilever, which is a British multinational company. Some of the brands under its portfolio include lux, rin, vaseline, knorr, pepsodent, dove, kissan, etc. the company has been one of the leading suppliers of FMCG products in over 190 countries.
It is one of the leading international Information Technology companies in India. Infosys has a global presence across 50+ countries. This was the first Indian company to get listed on NASDAQ in the year 1999. A few of the major clients of the company are ICICI Bank, HSBC Bank, Bank of America, etc.
This company has been ranked no. 32 by Fortune India 500 in terms of total revenue in 2020. It provides extensive IT solutions and services along with offering products in the healthcare and consumer care sectors.
Hindustan Zinc Ltd.
This is the country’s largest and the world’s second-largest zinc-lead miner. It is the subsidiary company of Vedanta Group Ltd. It is involved in the process of mining and smelting metals like zinc, silver, and lead in India. It is the only integrated producer of zinc-lead in India. Its product portfolio consists of cadmium metal, sulphuric acid, silver metal, zinc ore, zinc metal, etc.
(Source: Hindustan Zinc)
This company was incorporated under the name Imperial Tobacco Company of India Ltd. to manufacture tobacco and cigarettes in India. Later on, it diversified its presence across multiple verticals including cigarettes, Hotels, FMCG, agribusiness, packaging, etc. Its agri-business is one of the major exporters of agricultural products in India.
We all know cash is the king but only if it is used wisely and efficiently.. We have provided you with top cash-generating companies, but this cannot be the only criteria to invest in them. Having huge amounts of cash without proper usage shows the mismanagement of funds.
To sum up, it all boils down to how the cash generated is being used by the company. Because that’s all that matters!