Just found this thread while searching for something else. I thought I’d leave my two cents on this.
How would you treat a company with lots of liquid cash in its Balance Sheet? No, not the Operating Cash items (Loans given to employees, Deposits with the Tax Department, Cash blocked for purchase of Inventory etc), but I mean the really liquid cash like Cash/Bank/Bonds and Mutual Fund/Equity Investments.
If the company is prudent with accounting, the gains from these will not show up in the Operating Profits of the company. More often than not, these show up as ‘Other Income’ and so on, which should ideally not be considered while trying to Value a company.
I personally define ‘Capital Invested’ as (Total Fixed Assets + (Current Assets - Cash - Cash Equivalents) - (Current Liabilities - Deferred Tax Liabilities)). In essence, I remove Cash & Cash Equivalents from the “Capital” of the company and add it back separately once I’m done Valuing the company (While being careful not to include the gains/income from these in the profit of the company). This boosts the company’s capital turnover, at the downside of these additional Assets treated at face value and nothing more.
I’d love to hear the thoughts on this from some of the seniors in this forum.
Edit: Found an old blog post from Prof. Damodaran on the topic
Also a paper on the same (Impact of Cash and Cross Holdings on Equity Investors):
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=841485
This will be an interesting discussion.