Just like people, companies can work hard to grow a business, but be cash poor. Or they could have a lot of assets, yet be "asset rich, cash poor". Conversely, they could have what seems to be a lot of debt, but if net earnings are high enough, the business may be able to grow despite the high gearing.
In the end, it comes down to how much money is going out and how much is coming in. Here are some companies that prove "cash is king" within the S&P ASX 200 Index (ASX: ^XJO).
No debt in sight
Iress Ltd (ASX: IRE) has zero debt and in 2013 pulled in NPAT of $39.2 million to achieve $46.1 million free cash flow after $11.9 million in gross investment.
In September, it completed the acquisition of Avelo, a leading UK financial services and wealth management technology company. The business has 35,000 users, among which are 93 of the top 100 IFA (independent financial advisor) firms. This complements its industry-leader status in Australia with its successful web-based XPLAN financial market and wealth management platform.
James Hardie Industries plc (ASX: JHX) went down to nil debt in late 2012 and as of end of September 2013 had $204 million in cash on its books. In that half-year result, its interim NPAT shot up to $208.5 million from $79.8 million in the previous corresponding period.
The building materials producer is benefitting from a recovery in the US housing market, where about 69% of total revenue comes from. It declared there will be an eight cent per share (cps) interim dividend, up from the five cps interim dividend in 2013 and double the four cps dividend in 2012.
REA Group Limited (ASX: REA) continued its money-spinner status by increasing NPAT from $86.7 million to $109.7 million in 2013. At 30 June 2013, it had $257 million in cash and $114 million in free cash flow. It hasn't held short or long-term debt since 2010.
As the owner of realestate.com.au, the leading property listings portal in Australia, the revival in the housing market will drive more listings, both of existing and off-the-plan homes.
This month it just acquired Form1.com for $15 million. It's a market leading rental application service. It will connect more consumers to its property-related services and strengthen the brand.
Foolish takeaway
Having no debt at all doesn't make a company successful, and having a fair proportion of debt to grow the business is normal since good investments sometimes take a number of years to pay off.
However, there are companies that reach a point where they can make more than they need to run the company and cover capital expenditure for further growth. High net profit margins and hefty free cash flows are the first sign of that.
