Cash Is King—Along With Low Debt, Reduced Inventories, Good Growth, etc.

Apr 15, 2008 11:59 AM

I read a news story the other day about how Bernanke and Greenspan both agree that many companies have lots of cash on the books, saying businesses are in far better shape now than they were during the last two economic contractions we had.

The article was quick to point out, however, that they were excluding financial companies. But they also made it a point to say that many companies all across the rest of the industries—from Cisco to Coca-Cola Co., to cite their examples—have "socked away" cash, reduced their debt and have cut inventories.

This led Mr. Greenspan to say “We still have what, at the moment at least, appears to be a reasonably good real economy ... ” Bernanke too, remarked, that this was a “positive” for the economy.

All that being said, I decided to put together a screen for these solid, cash rich, low debt, reduced-inventory companies.

Here we go:

I first looked for companies with cash and marketable securities higher now than they were last year at this time. Having a strong cash position means companies will not have to depend on banks to finance their operations, especially in this tight credit market.
I also want the debt-to-total capital to be less than the five-year average debt to total capital. Companies able to reduce their debt positions from their historical ratios offers a sign of strength and a healthy balance sheet.
I want the cash flow to be greater than the cash flow from last year. This is also a sign of financial health.
I want to see inventories below last year's levels, too. Turnover of inventory (raw materials, unfinished goods and finished goods) is one of the primary ways that a company makes money. High levels of inventory over long periods of time are usually not a good sign.
I also want the stocks to show annual EPS growth rates that are greater than the median for their respective industries. This let’s us focus on the top half of the companies in their peer group.
Lastly, I want their next year’s EPS growth rate to be better than last year. Companies expecting growth in this current economy are favorable.

And all of the above criteria are applied to stocks trading at or above $5, and have an average daily trade volume of at least 50,000 shares or more.

Here’s a few stocks from that list for 4/15/08:

HL Hecla Mining Company
LFUS Littlefuse, Inc.
OI Owens-Illinois, Inc.

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