You are welcome to try out the new site at https://beta.valueresearchonline.com
Companies Flying on Float
A select group of companies enjoy customer advances as working capital. A look at this type of finance, its advantages and what else to check up on
By Research Desk | Nov 25, 2014
It’s all about money with corporates. They need money for operations and then often a lot more for capital expenditure. Working capital is either self-generated if the quality of the business is good or financed through banks. There is a third source of working capital - customers. Advances received from customers for services or products often go a long way to reduce a company’s dependence on working capital financing. An added bonus is lower interest costs.
Insurance companies are one of the biggest beneficiaries of such businesses. They get money upfront and need to payout claims only as they arise later. Float as this is called has been used in the most exceptional manner by Warren Buffett, the world’s most successful investor who uses it to make his multi-billion dollar acquisitions. This is how Buffett explains the advantage of float; “This collect-now, pay-later model leaves us holding large sums - money we call “float” - that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit”.
Insurance is not the only business that generates advances. In the table below we list out 14 companies from sectors as diverse as agriculture, engineering, mining and tobacco among others that generate healthy advances.
Generating advances is one thing, you also need to keep your eye open to other factors like whether companies make positive cash flows from operations and just to be safe, whether debt is lower than advances. Look at how companies utilise these advances - do they re-invest this money back into the business or into other lower-return businesses. Real estate companies get knocked out of our list for opacity about how they utilise their advances.
Companies with float
|Company name||Net advances|
|TTM net profit|
|As per FY14 data|
Value Research Stock Advisor now has 37 stock recommendations and new ones are added every month. Thousands of our members are using the current market conditions to buy great stocks at low prices.
Membership of this premium service is available at a 40% to 60% discount. Learn more and become a member