How can a company trade at a market cap below its cash on hand?

Question

My question is general, but prompted by the current stock price of NASDAQ:CRTO (https://www.google.com/search?q=crto&tbm=fin). The company is currently trading at a market cap of less than 400M$ but the last earnings report shows 418.76M$ "cash on hand".

Does it mean that anyone buying the company would make instant profit ? What sense does it even make to be valued below the cash you're sitting on ?

This is not even regarding the fact that the company is also generating money through its activity, and all the material assets they possess like servers & stuff.

---

Edit : the company has virtually no debt.

Answer 1

I'm not sure why you say, "the company has virtually no debt". Their balance sheet says otherwise.

CRTO has about $390 million in accounts payable. Their total liabilities are approximately $750 million. So they may have lots of cash, but they owe even more money than that. Shareholders can't take the company's cash without paying off the company's debts.

The company currently has about $1 billion in assets (and that includes around $400 million in assets that you can't sell such as goodwill) and $1.8 billion in debt. So it's in the red by $0.8 billion to $1.2 billion. The company only has a positive value because people believe its condition will improve. This isn't an unreasonable expectation as they have solid revenue.

Answer 2

Even a company with $100M in cash isn't worth that much if, for example, it has $60M in debt. Equity holders only get paid after debtholders get paid. That's why equity has a higher risk and a higher return than debtholders.

If the company you're looking at has any debt at all, that would reduce the value of their equity trading on the stock market. Whether that is the only thing going on, I don't know.

Answer 3

Even assuming they have no debt, if revenue dries up they could quickly burn through that pile of cash. The stock may be currently undervalued, but the price reflects the uncertainty of their ability to use that cash and other assets to churn out profits in the future.

If they had no debt and were liquidated today then you could definitively say they are undervalued.

Answer 4

Market capitalization is a completely theoretical value that is based on how much investors are willing to pay for the stock, which in turn in based on investor expectations for the future of the company. It has nothing to with the actual balance sheet of the company.

Let's look at a simpler example:

• Company X has an initial public offer that raises $100M.
• They use $90M of the money raised to purchase equipment.
• The company earns $7M of profit.
• The value of the equipment has depreciated to $60M.
• Investors are enthusiastic about the company, raising the stock price by 50%.

So what is the value of the company now?

• The market capitalization is now 100 x 1.50 = $150M.
• The company has 100 - 90 + 7 = $17M cash on hand. Note how this is less than the market capitalization.
• The total assets of the company are 17 + 60 = $77M. This is also less than the market capitalization.

And yet, the company is successful and liquid. Market capitalization has nothing to do with the company's balance sheet.

Answer 5

There are many reasons that the shareholder decide to sell a stock during the bear. It is mostly due to opportunity cost justification, i.e.

• Company never pays dividends
• Low rebound potential
• Company dilluting per stock value
• Poor future earning prospect
• there are better company to invest the same dollar

No, you cannot make "instant profit" after you purchase the stock. Public stock only pay out the profit/cash via dividends payout. Since the company never have a dividends payment record, you will not make any profit if you holding the stock. Unless you are able to sell the share in higher price later.

Answer 6

Suppose my company has a billion dollars in cash and no debt. Now suppose I expect to lose 2 billion dollars on my trading in the next year, and it's unlikely that anyone will lend to me to cover the shortfall. I'm likely to go bankrupt, and my stock is close to worthless. That is, it will be worth much less than the cash on hand. It's worthless now because analysts can see the problems.

Obviously on the contrary if I have a billion dollars in cash and expect to make two billion dollars from it for every year for the foreseeable future then the stock is going to be quite highly valued.

So stock value is only tangentially related to the current cash, debt etc. (the balance sheet). It's primarily based on expectations of future cashflow.

Answer 7

There are several similar answers, but I feel a need to clarify how stock prices really work.

The original post is about Point 3 below -- someone taking Control of the Company and divesting its assets.

The stock price shown on exchange as current is actually two prices: how much someone is prepared to pay for a "small" number of stocks, and how much someone is willing to sell a "small" number of stocks. The part of "small" is relevant for Point 3 below.

The buyer of a stock is willing to pay for one, two or three things:

1. Future dividends (guessing how much the Company will pay in dividends)
2. Future change in the stock value (guessing how much other buyers are willing to pay for the stock)
3. Control of the Company (often requires buying a lot of shares, hence in getting control there is generally a premium paid above current share price).

Point 3 might be because you want to do a merger, or simply divest the companies assets, or any other reason. Control requires a large part, often at least 50%, of the votes for the shares (note that in some countries different types of shares can have different voting rights). There are in many markets a minority shareholder protection, say if other shareholders has above 10% to complicate matters a bit more.

(Of course, for an individual sale there can be further reasons. Not unusual is to realize a profit / loss in order to influence taxes).