Introduction
A business's financial health depends on its ability to generate sufficient revenue to cover essential expenses like supplier payments, raw material purchases, and employee salaries. Having ample cash reserves is important for safeguarding a company against potential crises, such as liquidity shortages, the departure of foreign institutional investors, or rising interest rates.
Free cash flow is an important metric to check when analysing cash-rich companies. Free cash flow is the cash a company generates after accounting for operating expenses, capital asset maintenance, and other cash outflows. Unlike earnings or net income, FCF considers changes in working capital from the balance sheet and capital expenditures while excluding non-cash expenses from the income statement.
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In this article, we explore India's top 5 cash-rich companies, shedding light on their business and financial strength.
Coal India Ltd
Coal India Ltd engages in coal mining and production. It also operates coal washeries. Its primary consumer base includes the power, steel sectors, cement, fertilisers, and brick kilns.
The company maintains a nearly debt-free status and offers an attractive dividend yield of 6.68%. Over the past five years, it has demonstrated substantial profit growth at a CAGR of 31.9%, backed by a robust return on equity (ROE) track record of 46.8% over three years. Coal India Ltd consistently maintains a healthy dividend payout of 63.7%.
It has a substantial cash balance of ₹5,112 Cr.
Tata Consultancy Services Ltd
As a flagship company of the Tata group, TCS operates as an IT services, consulting, and business solutions provider with a history spanning over 50 years. TCS offers a comprehensive portfolio of business, technology, and engineering services with a consulting-led and cognitive-powered approach.
TCS maintains an almost debt-free status, with an ROE of 43.3% over three years. The company consistently delivers a healthy dividend payout of 61.4%.
TCS holds a substantial cash balance of ₹6,858 Cr.
Infosys Ltd:
Infosys Ltd is a prominent player in the consulting, technology, outsourcing, and digital services sector, empowering clients in their digital transformation strategies. It ranks as the second-largest IT company in India, trailing only TCS.
The company showcases a strong ROE track record of 29.4% over three years and maintains a healthy dividend payout of 58.8%. It has a cash balance of ₹24,714 Cr. and remains well-positioned in the industry.
ITC Ltd:
Established in 1910, ITC Ltd is the largest cigarette manufacturer and seller in India, operating across five business segments FMCG cigarettes, FMCG others, hotels, paperboards, paper and packaging, and agri-business.
The company's nearly debt-free status and ROE track record of 25 % over three years. ITC consistently rewards shareholders with a healthy dividend payout of 98.0% and has a cash balance of ₹ 310 Cr.
HCL Tech
HCL Tech is a leading global IT services company, ranking among the top five Indian IT services firms by revenue. Since its IPO in 1999, the company has focused on transformational outsourcing, offering a wide range of services, including software-led IT solutions, remote infrastructure management, engineering and R&D services, and BPO.
HCL is debt-free and gives investors a favourable dividend yield of 3.28%. It maintains a dividend payout of 65.5%. The company's financial stability is further exemplified by its substantial cash balance of ₹6,521 Cr.
Final thoughts
When a company's balance sheet boasts a surplus of cash, it can raise questions among investors about why it isn't deploying it for different purposes. A consistent rise in cash holdings indicates the company is experiencing increased revenue generation.
Cash surplus can vary based on the sectors or industries in which the companies operate. For example, industries with capital-intensive manufacturing processes may face greater challenges in accumulating cash due to constant equipment replenishment needs. On the other hand, software companies typically have lower cash outflows.
A stable and growing cash reserve often signifies strong company performance. It highlights the rapid cash accumulation, sometimes even outpacing management's ability to devise cash usage strategies.
Hence the challenge, as an investor, is to validate the existence of cash reserves and find out how the management is trying to put it to use. Investing in cash-rich companies is generally considered a good investment practice as it shows good financial strength in the company.
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