Trading Below Cash

The financial term "trading below cash" occurs when a company's total share value is less than its cash minus debts. Trading below cash occurs when a company's market capitalization is less than its amount of cash it has on hand. Trading below cash often occurs when growth prospects are poor.

Trading below cash may or may not be viewed as a negative depending on the company outlook. If a company is in the process of a turnaround, the stock may be trading below cash with the potential to succeed in the future. The opposite may also be true, if a company is trading at below cash with weak growth prospects, it may be a sign the company is in trouble.

There's an old saying, "even a palace isn't worth much if it's on fire," meaning that a company's cash reserves aren't nearly as important as how fast the money is being spent (the burn rate).

Trading below cash can be illustrated by a company which holds $2,000,000 in cash reserves, has $1,000,000 in outstanding liabilities, and has a total market capitalization equal to $650,000. Its cash reserves less its liabilities are equal to $1,000,000 ($2MM - $1MM = $1MM), while the total value of its stock is only $650,000.

A company trading below its net cash per share seems a natural bargain buy. However, without digging deeper, investors can get lured into a classic value trap. Which occurs when a stock that appears to be cheap is trading at low valuation metrics such as multiples of earnings, cash flow or book value for an extended time period. Relative to historical valuation multiples for the stock or a market multiple, things look inexpensive. However, the value trap is sprung when investors buy into the company at low prices and the stock continues to languish or drop further. Sometimes, things get worse before they get better.

During a strong bull market, companies rarely trade below their cash values. But these situations do arise during sharp corrections, such as during the housing collapse of 2008. Certain sectors can also experience precipitous drops in market cap, such as the "tech wreck" of 2000 - 2002. Sectors and industries on the cusp of the "next best thing" at times trade below cash values. More recently these may have included cloud-based SaaS services, social networks, and increasingly anything tied to artificial intelligence.