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Cash provides a platform for growth and a defence from disaster. After scouring the market, Robert Tyerman selects cash-rich investment candidates

Cash is the life blood of business. It is BP's hefty cash pile which allows the energy giant to spend millions buying back its own shares and, at the other end of the market, it is bombed-out gold spec Bullion Resources' remaining £1.5 million of un-dissipated flotation cash, which has enabled the AIM straggler to weather a scandal over imaginary assets, avoid collapse and do deals to give it a future at a lowly 6.25p.

Companies with cash to spare are better placed than others to survive and grow. They can use their funds to keep investors sweet by raising their dividends or making acquisitions that, at this stage in the stock market cycle, are more likely to be chosen and priced advantageously than in the heady days of the turn-of-the-century tech boom.

The indebted get shunned

Even though inflation is showing some signs of gaining speed, cash is prized and high debt levels are out of favour. Leading small company fund manager Peter Webb, chief executive of the Unicorn investment group, sums up the mood.

'Companies with high debt are still being shunned,' he maintains. On the other hand, those which combine cash with sensible ideas of using it to fund future growth are finding favour.

If a company simply sits on its cash or uses it mostly to pay dividends, that could be taken as a sign of 'maturity', that its growth phase is over and not much excitement can be expected in future. A company with no vision might as well give away all its cash or become a shell for a more entrepreneurial manager to take in hand.

Some feel the picture is changing, with borrowing and gearing regaining favour while memories of the dotcom bubble fade and stock market indices advance. Colin Maclean, for example, who steers Scottish Value Management, argues that the cost of money is still relatively low, while institutional investors have plenty of money to back corporate projects that make sense.

But it remains true that cash, especially in the right corporate hands, provides both a defence from troubles and a platform for growth that does not carry the gearing risk which in recent years has brought so many famous companies low. AIM lists a variety of companies sitting for different reasons on useful piles of cash to consider.

Making good use of cash

Flooring group James Halstead is one company which has impressed AIM punters with its use of cash. Halstead moved down from the Full List to the junior stock market three years ago and increased pre-tax profits 94 per cent to £13.7 million last year. It ended 2004 with £37 million of cash, a third of its turnover and 25 per cent of its present market value.

The company spent nearly half of that paying a special dividend worth 60p a share and used some more to acquire the Falck group of Sweden. Halstead's shares, first highlighted by Growth Company Investor in 2002, have nearly doubled in two years to 582p and still have fans among the institutions.

A more recent AIM arrival is Netstore, which supplies out-sourced computer services to local authorities and other bodies. The company, whose shares have risen nearly 40 per cent to 46.75p since its November flotation, recently moved into a modest £500,000 interim profit and showed cash of £13.4 million at the half-year stage in December. (See page 7.)

Community Broking, which provides insurance for small, and medium-sized corporate clients, showed cash of £1 million, against a present AIM value of £3 million at 39p, with its latest interim figures. These revealed first-half pre-tax profits increased respectably to £107,000 on revenues of £946,000.

One cash-rich company that has already won favour with private and institutional investors alike is Synergy Healthcare. This group provides 'linen maintenance' for the healthcare sector and recently hoisted its first-half profits 93 per cent to £3.4 million on a six-month turnover of £29 million. It sports cash of £12.7 million, though its merits are well recognised with an AIM tag of £161 million at 444p a share.

A mixed bag

Some companies have significantly higher levels of cash than this. But it is important to distinguish between those where this is accompanied by satisfactory trading and those whose stash is vulnerable to attrition.

AIM-listed pubs and property group Comland Commercial, for example, boasted £22.3 million cash at the interim stage, swollen by disposals. This was £4.3 million more than its £18 million market value at 390p a share. The company trebled first half pre-tax profits to £3.4 million on turnover of £6.4 million.

On the other hand, insurance specialist 4Less Group had £7.1 million in the bank at its latest half year, compared with an AIM market tag of £2.35 million at 39p. However, the company was losing money to the tune of £476,000 in its most recent first six months and, deducting looming calls on its finances, had net cash of £1.2 million, though even this was 50 per cent of its market capitalisaton.

Niche insurance broker THB, which is valued at £20 million with the shares at a depressed 73p, showed impressive interim cash of £22 million – ten per cent more than its AIM value – along with six-month profits marginally lower at £900,000 on revenues of £15.4 million. But with creditors of £94 million, net assets stood at a modest £312,000.

Jarvis Porter, a former shell which moved by acquisition into specialist glass production, had cash of £5.2 million at the half-year stage, compared with a market value of only £4.6 million at 9.5p a share. But, with a range of problems including pension fund deficits, the company managed to make only £100,000 pre-tax in the first six months, down from £1.6 million a year earlier.

Disposals helped push that figure up to £1.2 million. But the company reported a net cash outflow of £600,000 and paid no interim dividend.

Investment research group Stockcube has its fans, with net cash of £4 million, against a market value of £5.8 million at 6p. With profitability improving and new, high-margin services being added to its product mix, bulls argue the company is in a strong position to advance.