An otherwise great company can quickly become a bad investment if its balance sheet begins to look stretched. That’s why it’s so important to check debt levels before buying its shares. Today, I’ll be looking at three companies that would still have cash on their books if they were required to pay off all debt immediately, which means they are have no ‘net debt’. Having reserves of cash can be handy for companies keen to make acquisitions, increase investment for growth or reward shareholders with special dividends.
Fashion fix
Great excitement greeted Boohoo.Com’s (LSE:BOO) arrival on the market back in March, 2014. That soon turned to concern when, in January 2015, the company warned that profits would be more than 25% below market expectations. The share price duly sank to 22p. Since then however, confidence in the online fashion retailer has returned, partly as a result of its finances becoming more secure. Over the past 18 months, the share price has steadily appreciated to 53p, despite a fair amount of macroeconomic uncertainty in the background.
Fashion retailing is, of course, an incredibly tough, competitive and fickle market to operate in. Despite having no net debt, Boohoo remains a growth story, with the obligatory high price-to-earnings (P/E) ratio, and could still disappoint. I remain invested in the £590m cap, partly because its lack of high street presence gives me confidence in its ability to react to trends far quicker than more established but increasingly staid brands.
Cash to burn
ARM Holdings (LSE:ARM) is, of course, the supplier of processors to Apple, among others. The company’s share price has increased by over 1,000% in the last eight years due to the growth of the iPhone and iPad. Given this kind of form, it’s hardly surprising that the company has built a large cash pile. Positively, ARM is now diversifying into other areas such as servers and networking infrastructure. Not only this, but the company’s sound balance sheet has allowed it to increase R&D spending into developing the next generation of processors.
One of the only drawbacks to owning shares in the company is its paltry dividend yield. At 1%, this is far below that offered by other FTSE100 companies. Then again, the payouts continue to grow at a breakneck rate every year. And given that the board seems to be making all the right moves, perhaps investors are happy with that for now.
A cheaper alternative?
Times have been better at Victrex (LSE:VCT), the £1.25bn cap world leader in high performance polymer solutions. Exactly a year ago, shares in the company were trading at 2,115p. Today, thanks to oil price woes and global growth concerns, they’re just 1,443p, a decline of 46%.
The P/E for the company is a reasonable 15.5, dropping to just over 14 for 2017. The dividend yield for the current year comes in at around 3.5%, easily covered by earnings. Although its net cash figure has dropped every year since 2013, Victrex still seems a healthy company. Indeed, its rock-solid balance sheet, consistently high levels of profitability and long history of dividend growth make the shares attractive in my opinion. True, earnings aren’t predicted to grow as rapidly as they are for Boohoo or ARM, but the current slump in the share price may represent an opportunity for income-focused investors.
