Sometimes when companies endure a sustained market drop, it's hard to see any light at the end of the tunnel. Momentum is a powerful force and management usually require time and resources to break the downward spiral.
The following three stocks have experienced share price declines over the last year, but they all have one secret weapon in common:
| Company name | % drop from 52 week high | Cash & short term investments* | Total liabilities* |
| Servcorp Limited (ASX: SRV) | 33% | $122m | $116m |
| Perpetual Limited (ASX: PPT) | 31% | $556m | $496m |
| Nanosonics Ltd. (ASX: NAN) | 12% | $67m | $12m |
* All cash and total liabilities balances above are as at the company's last reporting date.
As you can see, these companies all have significant amounts of cash and short term investments that are higher than total liabilities.
This in an important metric I usually check particularly when a company's share price has declined significantly for the following reasons:
- Low debt levels typically result in lower ongoing obligations for the company and more free cash flow
- Cash gives management enough runaway to implement new strategies and grow the business
- The company's fate is not in the hands of external financiers who may act to significantly dilute existing shareholders
Risks
Whilst having low levels of debt relative to cash is desirable, it should not be the only consideration, particularly when the market is already losing confidence in the company.
Investors should always consider the prospects of the business looking ahead as well as management's ability to use that cash effectively to grow shareholder value.
Foolish Takeaway
Given Servcorp's challenges with strong competition in the US and the recent change of leadership at Perpetual, my preferred pick from the above list would be Nanosonics. This company has a huge market opportunity with its trophon technology.
Mind you I think this emerging investment opportunity could be even more exciting than Nanosonics.
