The One Thing You Need to Look for Now Is Cash

COMPANIES WITH STRONG balance sheets are back. Over the past few years, many investors have focused mainly on “income statement investing,” which looks at indicators such as earnings per share (EPS) guidance numbers, sales, and general revenue items.

- CONSTANTIN COSEREANU

The Covid-19 pandemic put at least a temporary hold on that as companies stopped issuing ballpark earnings estimates, laid off their workers, and started borrowing heavily.

Investors have now turned their attention to debt levels, asset quality, liquidity of a company’s assets, loan levels, covenants, and, most important, strong cash flows. We can already see how this strategy might play out. The 20 companies on exchanges in the U.S., Canada, the U.K., and western Europe that have performed the best on these criteria far outpaced the MSCI World Index in the 10 years to the end of April. Those companies, combined into a single index, returned 419.8%, vs. 143.1% for the global benchmark.

TO TAKE A LOOK FOR YOURSELF, run {EQS }. In the amber box under Add Criteria, type “United States” and choose United States-Exchanges from the autocomplete. Repeat the same thing for Canada and click on Canada-Exchanges, United Kingdom to get United Kingdom-Exchanges, and Western Europe to select Western Europe-Exchanges. This will narrow your universe to a little more than 29,000 companies.

Now we can start to find out more about each company’s debt and liquidity. In the amber box under Add Criteria, type “total debt to total assets” and select the option from the drop-down menu. Change the time period in the amber drop-down box to Latest Filing. In the amber drop-down box on the next line, change the criteria to Has Data. Then hit enter. Repeat these steps to set up other criteria: Sales to Total Assets, Net Debt/EBITDA, and Current Ratio.