A strong cash flow and a decent cash reserve are essential for any business. They offer companies a safety net to fall back on if the regular operations are derailed, or if the broad market suffers due to unprecedented circumstances. A cash reserve can help a company keep the lights on, even when no cash is flowing in from normal operational activities.
This is a lesson most companies are learning the hard way. The current pandemic has hit the economy in more ways than one. People have limited themselves into their homes, the workforce is thinning by the day, and the supply chains are disrupted. In times like these, companies that have decent cash holdings may weather the market headwinds much better than their peers.
A biosciences company
Aptose Bioscience (TSX: APS) is a Toronto based biotechnology firm that develops out-of-the-box oncology therapies for certain cancer types. Despite having a market cap of $643 million, it’s one of the biggest players of its kind on the TSX. The current condition of the company is a far cry from its glory days when the share price topped $2,600 per share, but the last three years were good for the company.
Currently, it’s trading at $8.45 per share, which is actually higher than the price it started the year with. Even if we consider the current discounted market price, the company’s three-year growth is well over 300%. Another good thing about the company is that it’s holding on to a total of $97 million in cash and has a debt of just $1.5 million. This means that the company can stay operational and relatively well funded, even in these trying times.
A silver company
Silvercrest Metals (TSX: SIL) is another company that is holding on to a decent bit of cash: $120 million. That’s more than one-fifth of the company’s total enterprise value. It’s currently trading at $7.4 per share; that’s about 15% down from the price it started the year with. Despite being hit hard by the pandemic, the company seems on solid footing. It has negligible debt and strong cash assets.
The company doesn’t have to wait for the market to stabilize to continue with its operational and expansion plans. It has been a rewarding company for its investors as well, returning almost 260% in the past three years.
A food-processing company
Even if there is a pandemic raging in the world, people still have to eat. Still, even the food-related companies have suffered from low foot traffic and diminishing consumer activity. But companies like George Weston (TSX: WN) are likely to stay afloat, even in these harsh times. The company has only lost 2.24% of its share price since the start of this year. And it has a cash hoard of $2 billion, about one-eighth of its total market capitalization.
It’s not a very lucrative growth stock, but it is a Dividend Aristocrat. It has consecutively increased its payouts for the past seven years. Currently, the yield is at 2.15%.
Foolish takeaway
Every company wants to have safety nets. But you will see that very few companies actually have enough safety cash reserves, because most of the extra cash is invested in future growth. It’s a fine strategy in good times when operational cash flows can cover the expenses, but in market crashes, lack of cash holdings can be a serious detriment to a company.
