Dr. Ali Yürüdü wrote for Bloomberg Businessweek Turkey: It’s Not Low Profits but Cash Shortages That Bring Companies Down
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 factor to look at is the company’s cash holdings.”
All over the world, accounting and finance serve the same purpose. As finance professionals, we examine a company’s cash flow to get a clear picture of its financial health. If we think of a company as a human body, its cash flow is the network of blood vessels that sustains it. Money, on the other hand, is the company’s blood. A company must have cash flow in order to continue operating. A company’s demise is not actually caused by a lack of profit, but rather by a lack of cash flow—that is, an unhealthy cash flow cycle.Investors should look for buying opportunities at the bottomThe cash flow statement begins with profit, and this is generally where everyone focuses. However, to understand how this “metabolism” works and to make a diagnosis, the key area to examine is the cash and cash equivalents listed at the very end of the statement—that is, the cash the company holds. The accounting journey that starts with profit and ends with the cash balance at the bottom line actually reveals how all the company’s components function and maintain balance over the course of a fiscal year. For example, there is profit; an investor looks at this and is satisfied. However, when a company wants to take out a loan from a bank, the bank examines the company’s entire financial journey over the course of a year to assess whether it can repay the loan, focusing on the cash on hand at the very end of the statement. This is because the cash flow statement as a whole shows the bank whether the company’s vital functions are operating healthily.What happens if the cash doesn't come in?One of the first questions we need to ask is whether the company’s short-term assets on the balance sheet are sufficient to cover its short-term liabilities on the liability side. If the ratio of these two items is one or higher, it is considered acceptable. However, if the assets are insufficient to cover the liabilities and this ratio falls below one, the company must find a source of financing. In other words, we can conclude that the company needs capital and must secure funding. There are various ways to secure this funding. These include shareholders injecting capital into the company, the company taking out a bank loan, selling assets, or, as has become increasingly popular in recent years, conducting an initial public offering (IPO).Is the source abroad, or under our pillow?We can say that companies have recently been favoring two approaches in particular when it comes to securing funding.The first of these are export financing loans—known as ECA loans—for which we act as intermediaries in securing financing from European banks. Our industrialists, particularly those with a need for high-value imported capital goods, are showing strong interest in these loans, which do not require any collateral or security. Since these foreign currency-denominated loans offer companies a stable, long-term repayment plan, they enable businesses to secure financing without disrupting their working capital balance.The second method is an initial public offering (IPO). In 2023, as we mark the 100th anniversary of our Republic and approach the 40th anniversary of our stock exchange, the number of companies trading on the stock exchange stands at around 500, thanks to the recent resurgence in IPOs. 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 being established at this pace, not every company can go public. Nevertheless, since the growth of this number is subject to strict regulations, we need to deepen our capital markets—both to encourage savers to shift their savings away from gold, deposits, real estate, and cars toward becoming partners in our country’s value-creating companies, and to provide our companies with a source of affordable, long-term financing when they decide to grow.Are IPOs a Craze or an Opportunity?Let me illustrate how far we still have to go in the capital markets by looking at our global standing. According to data for the first eight months of 2023, Borsa Istanbul ranks 26th in the world with a market capitalization of $359 billion. However, when market capitalization is measured as a percentage of our country’s gross domestic product, we rank 37th at 36 percent.Given the current situation, where the variety of investment instruments is so limited from an investor’s perspective, if we can effectively channel savers’ funds into the capital markets, our companies may finally be able to move beyond short-term financing—which is often just a stopgap measure—to implement their long-term plans. By connecting these companies with savers who may be keeping their savings tucked away under the mattress, we can make them an integral part of our productive economy. In fact, if we can—so to speak—succeed in making individuals partners in our companies’ aspirations, we can make our companies’ cash flows more secure in our country’s economy, which has been fluctuating for years; and we may even enable them to find the financing they need right here within our own country.
