When I first started investing, the “deep value” style of investing resonated with me. This style involves buying shares in a company that is trading at a discount to its net cash. It seemed like a sensible thing to do.
Buying a dollar for less than a dollar sounded like a common-sense approach that couldn’t go wrong.
But the net cash is just one aspect of a company. The company could be burning cash at unsustainable rates and destroying shareholder value. In this case, buying said company below its net cash will still turn out to be a bad investment.
Given this, investing in a company should not be based purely on its net cash but on the future cash flows that the company can generate.
How can a company be worth less than the cash it owns?
This is why I believe that it may even be possible for a company to be worth less than the net cash on its balance sheet....