MICHEL PIREU: Why cash is king when it comes to weighing up a firm’s position
Ask an Englishman how wealthy someone is and you’re likely to hear a response like, "he’s worth 20,000 per year", says William Bernstein. This sort of answer usually confuses the less sophisticated, he says, but it is an estimable response because it says something profound about wealth: it does not consist of inert assets but, instead, a stream of income. "If you own an orchard, its value is defined not by trees and land, but by the income it produces. The worth of a house is not what it will fetch, but the value of its future cash flow." Or, as Gamco Investors founder Mario Gabelli, puts it: "When the informed industrialist is evaluating a business for purchase, he is not going to put a lot of weight on stated book value. What he wants to know is: how much cash is this business throwing off today and how much will he have to invest to sustain or grow this stream of cash in the future." We forget the importance of cash. We forget that the only unforgivable sin in business is to run...
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