Main reasons for company go bankrupcy
The first reason why most new companies will fail or fail is to “run out of cash”. A more professional wording should be that the company’s long-term free cash is negative; or in ordinary people’s colloquial terms, it is unable to make ends meet. . Under the premise that cash payment cannot be found for the daily operations of the company, there is no other option but to close its doors.
Why does raising interest rates cause companies to lay off workers, increase unemployment, and cause companies to close down? Because when interest rates are low, companies can borrow money everywhere, which is usually when the economy is booming. During periods of economic prosperity, the stock market is booming, the IPO market is hot, and lending rates are low. At this time, banks hope that everyone can borrow money from them, and the interest rates are very friendly.
Investment guru’s views
Keynes
Keynes has a golden rule that applies to all financial matters: “The market can remain irrational longer than you can remain solvent.”
Buffett
Buffett said a classic saying at the 2022 Berkshire shareholders meeting: “Cash is like oxygen.” At the 2023 Berkshire shareholders meeting, he further said, “Believe me, cash is not garbage.”
On May 5, 2024, Buffett was asked about his judgment on selling stocks. Regarding the decision-making factors for selling stocks, Buffett said that there are often many reasons for reducing positions, one of which is the need for cash. This is not often the case for Berkshire Hathaway, but since he started investing at the age of 20, he has always done so. This happens every time you make a decision.
Buffett has never been shy about criticizing the investment strategy of holding on to cash. In an interview with PBS host Ross in 2008, he said: ” we want to use cash. The reason we haven’t used our cash two years ago, we just didn’t find things that were that attractive. But when people talk about cash being king, it’s not king if it just sits there and never does anything. There are times when cash buys more than other times, and this is one of the other times when it buys a fair amount more, so we use it.”
But “invest for investment’s sake” – blindly buy stocks or invest. Not other assets that you sincerely love – not a good idea.
Buffett has proven that sometimes it’s worth holding on to cash to ride out market turmoil, and this year has been a perfect example. Berkshire’s current cash level has risen to nearly $200 billion, a record high. “I don’t think anybody sitting at this table has any idea of how to use it effectively, and therefore we don’t use it,” he said at 2024’s Berkshire Hathaway shareholder meeting.
Apple’s approach
Jobs turns to Buffett for too much cash
In the “Ask Warren” segment, Buffett said, “It was an interesting conversation because I hadn’t talked to him in a long time. He said, ‘We’ve got all this cash. What should we do with it?’ So we went over the alternatives. It was kind of interesting.”
This dialogue between two industry titans sheds light on the decision-making process at one of the world’s most valuable companies.
Jobs was a conservative executive
Jobs, known for his transformative role in making Apple a global technology leader , reached out to Buffett to seek advice on the company’s cash-management strategies. Buffett, a legendary investor and chairman of Berkshire Hathaway Inc., outlined the four primary options available for deploying cash: stock buybacks, dividends, acquisitions, or holding onto it.
Despite Jobs’s acknowledgment that Apple’s stock was undervalued, indicating that buybacks could be a wise choice, he ultimately decided against taking any action, preferring to maintain the company’s cash reserves.
“I went through the logic of each thing. He told me they would not have the chance to make big acquisitions that would require lots of money ,” Buffett said. “And then I asked him the question, I said, ‘I would use it for buybacks if I thought my stock was undervalued.’ And I said, ‘How do you feel about that?’ The stock was 200-and-something. He said, ‘I think my stock is very undervalued.’ I said, ‘Well, what better to do with your money?’”
Why is Steve Jobs so conservative?
Jobs liked having the cash and that was what he ultimately decided was his best option. Buffett added that Jobs interpreted their conversation as Buffett endorsing his decision to hold onto the cash. “I later learned that he said I agreed with him to do nothing with the cash,” Buffett said.
Why is Steve Jobs so conservative? I personally think there are several reasons:
- Jobs once lowered his head and asked Microsoft’s Bill Gates for help because Apple’s daily operating cash was about to be exhausted. He even signed a humiliating equity investment agreement for Microsoft to invest in Apple.
- Jobs was expelled from Apple and forced to start his own company again, so he understands the desire of new companies for free cash flow.
- The Apple company that Steve Jobs later managed created a series of surprising products in the technology industry. It had just topped the U.S. stock market in terms of market capitalization not long ago. It adopted a conservative financial policy and reserved more cash for the company’s R&D and operations. At that time, Not unreasonable.
Cook’s financial management is more efficient
The discussion between Steve Jobs and Warren Buffett underscores a cautious financial approach, contrasting sharply with the bold actions of Jobs’s successor , Tim Cook. Cook’s tenure at Apple witnessed aggressive stock buybacks, totaling over $500 billion in the last decade, a sum surpassing the market capitalization of major corporations like Visa Inc., JPMorgan Chase & Co., and ExxonMobil Corp.
This demonstrates Apple’s steadfast commitment to repurchasing its shares. Apple’s buyback strategy not only boosted shareholder value but also increased Berkshire Hathaway’s stake in the company , despite no additional investment. Berkshire Hathaway , holding nearly 6% of Apple, benefited from these repurchases.
Apple is a role model for corporate cash use
Buffett publicly endorsed Apple’s buyback endeavors, citing their positive impact on Berkshire’s holdings and Apple’s ecosystem in his 2021 letter to shareholders. While Jobs prioritized liquidity , Cook utilized Apple’s financial robustness to actively manage its capital structure. This approach solidified Apple’s leadership in the technology sector , delivering value to both shareholders and stakeholders.
Apple’s Financial Health
Apple’s financial situation is quite healthy. As of the end of March this year, it had cash and marketable securities totaling $132.9 billion and total liabilities of $92.2 billion. Apple, Microsoft and Johnson & Johnson are the only three companies that still have Moody’s highest rating of “AAA”, one level higher than the “AA1” rating of US Treasury bonds.
Cash items in financial statements
Investors can learn about the company’s cash capacity from the following items in the company’s financial report:
- Cash, short-term investments and other cash equivalents (CCE)
- Cash from operating activities
- Free cash flow
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