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Investors warned to watch balance sheet strength
Investors are once again being warned to carefully vet potential company share purchases for balance sheet strength. A new study has shown that the average position on borrowings for FTSE 100 companies is worse now than during the credit crunch a decade ago.
The financial health check report, conducted by Bowmore Asset Management, has found that companies in the UK’s blue chip index would not, on average, be able to cover a full years’ worth of short-term borrowings with readily available cash resources.
FTSE 100 companies entered the lockdown with enough cash to cover their debts for 292 days on average, Bowmore found. That is substantially worse off than during the financial disaster of 2009, when the UK’s largest companies had cash to cover marginally more than a years worth of borrowings, or 369 days.
The Bowmore study looked at quick ratios of FTSE 100 companies, excluding financial companies, such as banks and insurers. The quick ratio measures the ability of companies to cover short-term debts with readily available cash, and is one of several financial health checks that analysts and fund managers use to gain an understanding of a company’s balance sheet strength.
A quick ratio of greater than one indicates that a company has more than enough cash to cover debts falling due within the next year. A rating of less than one means short-term borrowings are higher than available cash.
The average quick ratio for FTSE 100 companies now stands at 0.8 compared to 1.01 in 2009, the study states.
‘In the current economic climate, investors will be keeping a close eye on companies’ cash reserves and ability to cover debts, with good reason,’ said Charles Incledon, client director at Bowmore Asset Management.
‘Controlling cash burn is a top consideration both for management teams and shareholders as the coronavirus lockdown continues to weigh on demand. Those companies with good cash reserves will be out the blocks faster once the economy gets going again,’ said Incledon.
Since March, more than £8.1bn of new equity funding has been raised by UK companies, but the trend appears to be accelerating as businesses struggle to cope with lost revenues.
The last fortnight has seen £4.1bn of the £8.1bn total raised, with £3.9bn expressly relating to Covid-19, said analysts at broker Peel Hunt.
In the Bowmore study companies including Ocado (OCDO), Spirax-Sarco (SPX), BHP (BHP) and Halma (HLMA) were shown to have the most robust balance sheets with quick ratios ranging from 1.79 for Ocado to Halma’s 1.44.