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Why Warren Buffett likes 'floats'

Float companies have the unique ability of raising free cash as advances

Why Warren Buffett likes floats

Warren Buffett likes companies with floats. What's a float? Companies with 'floats' are the ones which manage to get huge 'free' cash from their customers as advances. The cash received from customers is free in the sense that the company doesn't have to pay interest on it. This cash helps float companies bring down working capital significantly and cut down the cash-conversion cycle, which is the total time taken to pay for raw materials till sales are realised in cash. That is why, Buffett prefers insurance companies in his portfolio. Insurance companies collect cash from customers in advance.

You can find advances from customers in the current-liability section of the balance sheet of a company. But we cannot rely blindly only on advances; we also need to check several other factors. For example, some sectors, like real estate, have high advances but those might not be utilised properly and they are a normal thing to be found on realty companies' balance sheets. Secondly, despite taking advances, a company might not be able to manage other aspects of working capital and hence we should consider only those companies which have positive cash flows from operating activities. Thirdly, the basic financial parameters must be checked. For instance, the return on equity should be high, the interest coverage ratio should be in a safe zone, etc. Last but not the least, we should avoid companies which have a very high cash-conversion cycle despite taking advances from customers. The cash-conversion cycle is calculated by adding receivable days and inventory days and subtracting payable days.

The following table gives Indian float companies. We have extracted these companies based on the above-mentioned quantitative criteria. Investors should consider this method as one of the points to determine a company's strength and should not take it as the sole factor to finalise their investments.