Examples of Companies with Large Working Capital

Northern Pipe Line Company



In 1926, this company had:



Total Equity: capital and surplus of $4,235,000,

represented by

Current Asset: $3,489,000 of cash assets, $33,000 of other current assets, and

Fixed Asset: $1,319,000 of net plant,

less

Total liabilities: $606,000.



Total business done was only about $500,000.



A good part of the net earnings of $375,000 ( $9.375 per share) came from investments in railroad bonds.



The stock sold for an average value of $2,880,000 ($72 per share for 40,000 shares), which was considerably less than the cash assets alone.



These cash assets had been accumulated mainly out of annual charges for depreciation.



Dividends had been generous in relation to earnings and amounted to $6 per share in 1926.



The business, formerly very prosperous, had lost a good part of the volume and, with it, its appeal to investors.



Clearly, the outside stock-holders were at a great disadvantage in having so much of their capital tied up in cash funds that were held by an unattractive enterprise.



The management claimed that it was necessary or advisable to retain this money, because some day they MIGHT want to build a new pipe line.



It required a strenuous proxy contest to change the management's thinking.



Later, cash distributions of $70 per share ($2,800,000) were made as a return of capital, and the stockholders' over-all position was greatly improved.



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Colt's Manufacturing Company.



This company emerged from the war with over $10 million in working capital, largely cash; but in 1946 its sales were only $5.0 million, and in 1946-1948 it lost money in the aggregate.



In this instance, the management embarked on two unrelated lines of business, in order to find additional employment for the large plant facilities and current assets. (However, the funds committed were held down to modest figures.)



The new lines did not prove successful, at least as far as enabling the company to show an adequate return on the owner's capital.



The stock sold persistently for much less than the working capital alone. (In 1947 the average price was 31, against net current assets or working capital of over $50 per share.)



Large stockholding interests, having previously obtained places on the board and having studied the company's problems and possibilities with care, finally decided that the capital should be reduced substantially by repurchasing a large proportion of the outstanding stock.



In 1950, following a call for tenders of stock, 125,000 shares, or 64% of the total, were bought in at a price as high as the working-capital value of $53.



The remaining shares had the same prorata interest as before in the current assets, and a much larger interest in the plant. This move was unquestionably beneficial both to the stockholders who sold back and to those who retained their stock, which sold as high as 65 soon after the repurchase.

Ref: Security Analysis by Graham and Dodd