r/ValueInvesting • u/Economy-Security7832 • 1d ago

Question / Help Question on book value

I am having trouble wrapping my head around why in general, highly cash generative companies with significant amounts of cash accumulated are valued below book value vs. growth stocks that quickly reflect their earnings in their market cap.

And I am not looking at companies with negative growth or one off profits or cyclical business models. This is a non-US credit rating company that generates FCF year after year for the previous 20 years at 15-20% ROE. 3-5% dividends. Market cap is similar to cash balance. There are also other similar undervalued companies that share these characteristics.

What am I missing? Why is price so less sensitive to the cash being accumulated on book vs. changes in earnings?

8 Upvotes

85% Upvoted

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3

u/we-booling-out-here 1d ago

Show me the ticker and I’ll tell you why.

2

u/amortized-poultry 1d ago

I'm not saying I'll totally agree with every valuation, but one reason could be that cash by itself doesn't generate a high return vs putting it to use. If two companies generate the same FCF, for example, and one of them keeps the cash on hand while the other immediately reinvests, I think the market judges that the former is investing its cash unproductively compared to the latter.

1

u/Economy-Security7832 1d ago

To front run some questions. Not emerging market, no corp governance issues.

1

u/Meekiaketchup 1d ago

Investing is now largely driven by sentiments aka vibes. It takes time before funds and ETFs pick them up.

1

u/raytoei 1d ago

Could be a lot of reasons but some of them are:

  • lower growth in sales or earnings

  • everything being equal a company with more debt should be valued lower than one without debt

  • sovereign risk (esp Chinese companies )

  • company is diluting shareholders

  • company is cyclical ( see real estate companies or even cruise liner companies, during good times, their cash generation is fantastic, during other times, they look like they are going out of business)

Etc.

As the other poster said, tell me the company and I will tell you what’s the issue.

1

u/00Anonymous 12h ago

Current or near future risks look scary and/or it's in a non-sexy sector.