Do these cash-rich companies offer opportunities for investors?

It’s normal for financially-sound companies to hold some cash on their balance sheet. But occasionally I come across companies where cash forms an unusually high proportion of the firm’s total assets.

This often intrigues me. I always aim to invest in companies with strong balance sheets. When I see businesses with a lot of cash, I can’t help wondering if they offer some kind of hidden opportunity or overlooked advantage.

To take a more systematic approach to hunting for cash-rich firms, I recently created a screen to highlight companies with a high proportion of cash relative to their total assets plus strong fundamentals and positive momentum.

In this piece I’ll explain what I found and highlight a number of stocks that could be worth further consideration.

Screening for good, cash-rich companies

After a little digging around in Stockopedia’s database, I found nearly 200 UK-listed companies where last-reported cash represented more than 25% of total assets – in some cases, over 50% (excluding financials, where different rules apply).

At first glance, this seems a little odd. After all, cash – in itself – is not generally a productive asset for a business.

While positive interest rates mean that cash now generates useful levels of interest income, I’d always hope that a decent business will be able to generate higher returns by deploying excess cash to expand its business – or else returning it to shareholders.

When I looked beneath the surface at some of these companies, things became clearer. A fair number of them were unprofitable micro-cap businesses relying on regular cash infusions to survive. Many – and I say this politely – were just not very good businesses.

In total, 76 companies had a StockRank of less than 20. I ruled these out immediately.

Of the remainder, I found that some of them do have good reasons for holding plenty of cash, while for others their reasoning is less clear.

Similarly, while some management teams skilfully manage their liquid assets for the benefit of shareholders, some appear unable or unwilling to do so.

To narrow down my list further to a more manageable size for further research, I created a simple screen with just five rules:

You can see and copy this screen here.

Here’s a brief explanation of these rules:

• Cash to assets ratio: compares last-reported cash balance with the value of the total assets on the latest balance sheet

• Economic sector: financial businesses often carry large cash balances for various reasons, but this sector needs to be viewed differently to reflect the various business models in use.

• Cash & Short Term Investments > 2x Long Term Debt: I’m looking for companies with net cash or at least relatively low levels of borrowing

• StockRank >75: applying a minimum StockRank allows me to incorporate a layer of quality, value and momentum filtering. My aim is to find timely opportunities with good near-term prospects.

• Market Cap >£25m: companies below this size may offer opportunities. But they also tend to require deeper research and may suffer from illiquidity, problems of scale and delisting risk.

This screen returns 27 results at the time of writing. Of these, 12 have a StockRank of 90 or higher. I’ve chosen these for this initial review of results:

Screen results

Looking down this list, there a couple of categories of company that stand out:

Construction groups (e.g. MGNS, COST, GFRD): these companies need plenty of cash and liquidity to underwrite their credibility with customers and ensure they can afford to fund the large working capital movements that are typical in this type of business (e.g. project startups).

These companies increasingly report monthly or even daily average net cash – this is commendable and reassuring, but this money isn’t surplus to requirements. Holding cash is simply a requirement of the business.

I would argue that utility group Yu probably also falls into this category, as it needs to be able to support collateral requirements when commodity prices change.

Companies holding customer cash (e.g. Jet2, PayPoint, Virgin Wines): travel and airline group Jet2 (LON:JET2) reported gross cash for £3.2bn in its latest accounts - £1.1bn of its own cash and £2.1bn of customer deposits.

PayPoint (LON:PAY) recently reported £20m of corporate cash and £131m of non-corporate cash (e.g. client cash collected from retailers, gift vouchers).

These are examples of businesses that hold substantial client cash, albeit often with an element of seasonality. Good examples (such as Jet2) will generate interest income from this cash and then convert a substantial part of it to free cash flow as contracted services are delivered.

3 stocks with genuine surplus cash

In the remainder of this piece, I’d like to highlight three companies from these results that I think have genuine surplus cash. By this, I mean that I think their cash provides management with the option to invest in new growth opportunities or perhaps consider larger shareholder returns.

Of course, there’s no guarantee that I’m right or that this will actually happen. Even if it does happen, the cash might not be used in a way that generates genuine value for shareholders. This is an area where shareholder/management alignment is often uncertain.

Virgin Wines UK (LON:VINO)

This wine retailer is a slightly odd situation, in my view. Holding customer deposits is part of the business model. These totalled £6.4m in the last accounts (27 Dec 24), but Virgin Wines also had a net cash position of £17.3m in addition to this restricted cash.

Indeed, Virgin Wines’ net cash position has steadily improved in recent years…

… despite the fact that it’s not always made very much profit:

The increase in cash seems genuine, although I think it has been aided by liquidating inventory since the pandemic:

Virgin Wines’ recent £17m own net cash figure represents half the group’s £33m market cap. The company now plans to use some of this cash to try and accelerate its growth. This appears to be comfortably affordable, as does the recently-announced buyback targeting up to 15% of the share count (c.£5m @68p).

On the other hand, the reality is that this business isn’t very profitable. Returns over the last year are likely to be well below the company’s cost of capital:

Virgin Wines’ own medium-term target is for “£100m in annual revenue at a 7% EBITDA margin”.

Stripping EBITDA down to EBIT (operating profit) suggests to me that the group’s operating margin is likely to remain in low single digits, even if these targets are met.

All else being equal, using surplus cash to buy back shares will boost the group’s return on equity, as it will result in a reduction in book value. However, this is just financial engineering. It doesn’t mean that the underlying operating business will become more profitable. If this fails to happen, the shares could flatline or fall once the adrenaline boost provided by a big buyback subsides.

My view: Virgin Wines has a very high StockRank and Super Stock status. The algorithms might be seeing something here that I’m missing.

Personally, I’m not convinced by the opportunity at the current share price. Stripping out net cash gives Virgin Wines an cash-adjusted FY25E P/E of 18. That might be acceptable for a profitable growth stock. However, it seems high to me, given that earnings momentum for FY26 appears very weak, with a small loss forecast next year:

Without achieving a better-than-expected performance, I’d argue that the share price seems up with events at current levels and not obviously cheap.

I'm not convinced a buyback will generate attractive returns at this level and believe it would be fairer for management to return surplus cash through dividends instead. In this way, shareholders would receive a tangible return that would retain its value even if the underlying business disappointed.

Volvere (LON:VLE)

This investment business owns a food production business (Shire Foods) and boasts a £27m net cash pile.

Cash accounts for more than half Volvere’s £48m market cap and provides management with a clear opportunity to invest in new assets if they can find a suitable opportunity (or return cash to shareholders if they can’t).

There’s also the potential for Shire Foods to be sold at some point, potentially realising an increase on its current book value of £17m.

Graham has covered this stock extensively and recently explained why he thinks the shares could still be undervalued, but why he might also support a wind-up of the business.

My view: Volvere shares have doubled over the last two years. But despite this strong performance, I share Graham’s view that the shares could still offer value at current levels.

However, even if Volvere does make another acquisition, there’s no certainty it will be as successful as Shire Foods has been. We don't know how long it might take to materialise, either.

I think potential investors need to consider the company’s commentary on acquisitions and decide if they’re willing to take a long-term view and trust management to generate shareholder value from the cash pile.

Journeo (LON:JNEO)

This small cap produces information systems and other passenger-focused technical solutions for public transport operators. It sounds pretty dull, but I don’t think it is.

Revenue has quadrupled over the last four years:

The business is now starting to show real signs of operating leverage, with greater scale supporting a significant improvement in profitability – quality metrics are now at very respectable levels:

I was pleased and a little surprised to see Journeo in the results of this screen, because it strikes me as another business where the large cash balance is likely to be genuinely unrestricted.

The latest accounts show Journeo with cash of £14.3m and no major debt or leasing liabilities. The only big number that doesn’t show up in the net cash balance is £4.5m of deferred revenue – this is normally advance payment received from customers for services not yet provided.

Even taking a very conservative approach, I still get a net cash figure of around £9m for this business. That’s equivalent to 21% of Journeo’s total assets and around 17% of its market cap. This is money the company can use for investing in growth or acquisitions or potentially returning to shareholders.

CEO Russ Singleton owns about 3.6% of this business, which has been listed on the AIM market since 2005. He has overseen an impressive streak of growth over the last few years. Even after recent gains, Journeo's valuation still looks modest to me, given the company’s improving profitability and near-term growth outlook:

Journeo is a NAPS stock this year and is a company I think could be worth considering in more detail.

Disclosure: at the time of publication, Roland owned shares in Yu and PayPoint.