When looking for relatively low-risk equity investments, companies with strong balance sheets are a good place to start the search. If they happen to be effectively debt-free with a net cash position, then even better. With no financial pressure on companies to service loans during business downturns, the risk of permanent loss of capital is greatly reduced. High debt levels can be particularly dangerous for small cap companies or highly cyclical businesses experiencing difficult trading conditions. The fact that a company has been able to build up a net cash position over time (assuming it hasn’t been raised from investors) is a good sign of the company’s ability to generate cash internally. Too many companies source cash from investors rather than from their own operations.

Using Bloomberg’s screening tool we screened the All Ordinaries universe for stocks reporting net cash positions on their balance sheets that also have the following characteristics:

  1. Market capitalisation above $300 million
  2. Return on equity above 15%
  3. Positive free cash flow yield and dividend yield
  4. EPS growth greater than 5% for the current year
  5. No EPS downgrade over the last 3 months
  6. PEG ratio below 1.10

We calculate the PEG ratio as the next twelve months (NTM) PE ratio divided by the 3-year EPS compound annual growth rate (CAGR) forecast, using consensus estimates. Seven net cash stocks met those criteria. They can be seen in the table below, ranked from lowest to highest PEG ratio.

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All of those stocks also happen to have consensus Buy/Outperform ratings from broker analysts, with the exception of Altium which has a consensus Hold rating. Most of the companies are fairly well known. Webjet is an online travel agency operating in Australia and NZ. Nick Scali Limited is a furniture retailer operating primarily on the east coast of Australia. Corporate Travel Management is a provider of travel management solutions to the corporate market with a presence throughout Australia, NZ, the US and Asia. The A2 Milk Company is engaged in the supply of and commercialization of intellectual property relating to A2 brand milk and related products.

Altium is involved in the development and sale of computer software for the design of printed circuit boards. Vita Group is an Australian electronics and telecommunications retailer comprising six brands: Fone Zone, One Zero, Next Byte, iConcierge, Vita Networks and Sprout Accessories, along with selected Telstra Shops and Telstra Business Centres. MNF Group is probably the least known of the seven stocks. It is a provider of internet-based telecommunication services that include VoIP (Voice over Internet Protocol) data and video services to residential and business enterprises.

None of these companies are immune from the business cycle, but having net cash on their balance sheets gives them a freedom that few companies enjoy and adds a degree of safety for investors.

Romano Sala Tenna

AFG can be added to this list? Market Cap $280m but was through $300m last week.