09-01-2021, 06:46 PM

So I was chatting with a friend (in the real world!) about how to factor a company's cash pile when assessing the share price and P/E ratio.

I assume there are several ways to approach the question mathematically (or pseudo-mathematically). The simplest that comes to mind for me is to subtract the per-share cash amount from the per-share price before dividing by earnings. For example, if the share price is $100, and earning are $5 per share, you've got a P/E of 20. But if the company is sitting on, say, $10 per share (total cash pile divided by shares outstanding), then it might be fair to think of the P/E as closer to 18 instead of 20 ($90 divided by $5).

Of course this kind of assumes that that the company were to pay out the entire cash pile as a special dividend to existing shareholders. They might use it instead to grow the business, make acquisitions, pay down debt, pursue buybacks, buy shares of other companies, etc.

How do you all think about the cask piles many companies are hoarding right now? How do you factor them into your analysis and decision-making? Any links to relevant information?

Thanks!

I assume there are several ways to approach the question mathematically (or pseudo-mathematically). The simplest that comes to mind for me is to subtract the per-share cash amount from the per-share price before dividing by earnings. For example, if the share price is $100, and earning are $5 per share, you've got a P/E of 20. But if the company is sitting on, say, $10 per share (total cash pile divided by shares outstanding), then it might be fair to think of the P/E as closer to 18 instead of 20 ($90 divided by $5).

Of course this kind of assumes that that the company were to pay out the entire cash pile as a special dividend to existing shareholders. They might use it instead to grow the business, make acquisitions, pay down debt, pursue buybacks, buy shares of other companies, etc.

How do you all think about the cask piles many companies are hoarding right now? How do you factor them into your analysis and decision-making? Any links to relevant information?

Thanks!