Dr. Ali Yürüdü wrote for Bloomberg Businessweek Turkey: It's Not Low Profits That Kill Companies, It's Cash Shortages
Dr. Ali Yürüdü, Managing Partner at Danista Capital Partners, wrote an article for Bloomberg Businessweek Turkey, one of the world's leading economics and business magazines.
"To understand how companies operate, the key thing to look at is the cash the company holds."
Accounting and finance serve the same purpose everywhere in the world. As finance professionals, we look at a company's cash flow to get a clear picture of its financial health. If we consider a company like the human body, cash flow is the entire network of blood vessels within that body. Money is the company's lifeblood. A company must have cash flow to continue operating. A company's demise is not actually due to unprofitability, but rather to the absence of cash flow—that is, to an unhealthy circulation.Investors should look for bottom-fishing opportunitiesThe cash flow statement begins with profit, and everyone generally focuses on this. However, to understand how this metabolism works and to be able to diagnose it, the place that really needs to be looked at is at the very end of this statement: the cash on hand, i.e., the cash the company possesses. The accounting journey that starts with profit and ends with the cash balance actually tells us how all the organs of a company function and their balance within a fiscal year. For example, there is profit; investors look at this and are satisfied. However, when a company wants to take out a loan from a bank, the bank will look at the company's entire journey over the past year and focus on the cash on hand at the end of the table in order to analyze whether the company will be able to repay the loan. This is because the cash flow statement as a whole shows the bank whether the company's vital functions are working properly.What happens if cash doesn't flow?One of the first questions we need to ask is whether the company's current assets can cover its current liabilities. If the ratio of these two items is one or above, it is acceptable. However, if the assets do not cover the liabilities and this ratio remains below one, the company needs to find a source of financing. In other words, we can conclude that the company needs capital and must secure a source of funding. There are various ways to obtain this source. These methods include shareholders investing money in the company, the company taking out a loan from a bank, selling assets, or, as has become popular in recent times, going public.Is the source abroad or under our pillow?We can say that companies have increasingly preferred two approaches, particularly when it comes to sourcing.The first of these is export finance loans known as ECA loans, which we arrange from European banks. Our industrialists, especially those with a high demand for imported capital goods, show great interest in these loans, which do not require any collateral or guarantee. As these foreign currency-based loans offer companies a stable and long-term payment plan, they enable them to create a source of financing without disrupting their working capital balance.The second method is public offering. As we leave behind the 100th anniversary of our Republic and approach the 40th anniversary of our stock exchange in 2023, the number of companies traded on the stock exchange is around 500, thanks to the recent revival of public offerings. While this number may sound high, to put it into perspective, in 2022, the number of companies established in Turkey exceeded 140,000. Of course, in a country where companies are established at this pace, not every company can go public. Nevertheless, since this increase is subject to strict rules, our capital markets need to deepen in order to shift savers' investments away from gold, deposits, real estate, and cars and into our country's value-creating companies, while also creating a cheap and long-term source of financing for our companies when they decide to grow.Are IPOs a fad or an opportunity?Let me express our position in the world by stating that we have a path to follow in the capital markets. According to the first eight months of 2023 data, Borsa Istanbul ranks 26th in the world with a market value of $359 billion. However, the ratio of market value to our country's gross domestic product is 36%, ranking 37th.From an investor's perspective, the current situation where there is such a lack of instrument diversity; if we can properly connect savers' savings with capital markets; perhaps our companies can now move away from short-term financing methods that merely get them through the day and instead connect with savers who may be keeping their savings under their mattresses, thereby becoming part of our productive economy. In fact, if we can successfully involve individuals in the dreams of our companies, we can make the cash flow of our companies more secure in our country's long-standing fluctuating economy; we can enable them to find the financing they need, perhaps within our country itself.
