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Singapore’s Cash-Rich Blue Chips

singapore currencyHere’s a question for you to think about: If running a business is about making money, then why are two-thirds of Straits Times Index (SGX: ^STI) companies swimming in debt rather than awash with cash?

According to Capita IQ, companies with net cash include two of Singapore’s biggest banks Overseas-Chinese Banking Corporation and United Overseas Bank. Singapore’s flagship carrier Singapore Airlines (SGX: C6L) is sitting on S$4 billion of net cash, which is probably as comfortable for its shareholders as its flying beds are for its passengers.

Genting Singapore (SGX: G13) has around S$2 billion in cash, while SembCorp Marine (SGX: S51) has S$1.2 billion in cash after deducting debts of S$433m from its cash pile of S$1.6 billion. Other companies with cash at the ready include Singapore Technologies, Singapore Exchange (SGX: S68) and SIA Engineering.

There are no hard-and-fast rules as to whether it is a good idea to sit on cash. Those in favour point to the obvious stability of cash particularly when times are hard. After all, lenders can ask always for loans to be repaid but cash is there for a company to do with as it pleases.

It can also be comforting for investors to know that the cash could provide a floor of sorts. So, unlike indebted companies where the share price can go to virtually zero, cash can offer a safety cushion. Additionally, companies can always return cash to shareholders through share buybacks and dividends, if they really are bereft of ideas as to what else to do with it.

Another advantage of cash is the ability for a company to pursue organic growth and make strategic acquisitions. What’s more, it can do this without going cap in hand to banks and or handing around begging bowl to shareholders.

But holding too much cash has its disadvantages too. Some investors would much rather businesses put the cash towards profitable capital projects rather than let it idle bank.

However, perhaps the biggest gripe that some investors have with cash-rich companies is the lower returns on shareholder funds. In fact, they would much rather businesses borrow and gear up with debt so less of the company’s own assets are being used. They have a point. However, it is never easy to decide the optimal capital structure for a business.

Generally, though, debt can increase investment risk. So it is important to be more cautious when a business has taken on too much borrowing. Personally, I like companies that generate cash, especially those that give lots of it back to shareholders.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.