“Help! My Stock Keeps Falling Everyday”

Credit: Amy McTigue

I know that feeling.

After all, the Straits Times Index (SGX: ^STI), Singapore’s market barometer, has fallen for five days in a row before today. With the index shedding another 1.9% as of the time of writing (9:22 am), it looks like it’d be clocking six consecutive days of daily declines.

No one likes to watch their share prices drop day by day and for many stock market participants, the few days of declines the index has suffered can feel like a lifetime.

But instead of sitting there being worried, there may be other productive things we can do for our investment portfolio.

Check the balance sheet

To be sure, I am hoping that this is something you already did before you bought shares of any company! But if you are feeling a little down about the market’s decline, it may be comforting to note down how much cash and borrowings that the companies you own have on their balance sheets.

Instant coffee manufacturer Super Group Ltd (SGX: S10) is one of those companies in Singapore that have seen its shares embark on a protracted decline in recent times. In its latest earnings report, the company reported a net cash position of $70.1 million ($103.4 million in cash and equivalents and $33.3 million in borrowings).

If a company has a net cash position on its balance sheet, it is less likely that its stock price will fall anywhere close to zero. For a share price to go to zero, it would be akin to saying that the company has no value left. If there is more cash than debt, then there are some valuable assets at the very least.

Check the free cash flow

A net cash position on the balance sheet alone might not be enough. If the company is struggling to generate cash from its business and as a result, burns through its cash pile in a matter of months, the previous check on the balance sheet would be moot.

So, let’s take things one step further by taking a look at the free cash flow (operating cash flow minus capital expenditures) of the companies you own shares of. If there is free cash flow, there may be a better chance that the cash pile from before is able to grow or be maintained.

There are other benefits that the presence of free cash flow can bring; for instance, it gives a company the resources (cash) to fund share buybacks as well as pay dividends.

As an example of a company that has demonstrated a track record of steady free cash flow generation over time, we can look at global caterer SATS Ltd (SGX: S58).

SATS's operating cash flow and capital expenditures

Source: SATS’s earnings report    

A Fool’s take

I have written before that my first experience with market corrections didn’t have the best of outcomes.

Thankfully, I have been able to move on from there, and focus my time on the right things. As the years went by, I learnt more about the companies that I own and the knowledge of the cash position and free cash flow that the company generates is a steadying influence that helps keeps my mind sane while the stock market tumbles inevitably from time to time.

If you are able to remain sane while others are losing their mind, you may stand a better chance of making good investing decisions that may pay off somewhere down the road.

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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 contributor Chin Hui Leong owns shares in Super Group Ltd.