Sheng Siong Group

[specuvestor]

u are confusing ROIC and ROE. ROIC is the return on the investment based on total capital employed which includes working capital. And for quarterly/ annual reporting you can't really see what is the REAL working capital by just a snapshot. We can assume however that this snapshot is the best picture that management can present

I am not an expert, but should have stayed in investing long enough to know the differences between ROE and ROIC/ROCE. I am using ROE to be consistent with previous posts in this thread

Can we really see the REAL working capital needed for a biz, over several years of data? I believe we can, with sufficient accuracy for a reasonable valuation.

Hence the cash could actually 1) be necessary for running the business or 2) it's just OPMI unfriendly management. Either way it is a drag on ROE which is the structural return of the ROIC after the layerings. And there is little that OPMI can do about it. Unless one can gain control and improve on the 2) then this is the raw deal you get by buying the listco. I strongly discourage people from using ex-cash, or ex-lousy asset type of valuation metrics unless you can control the outcome or you think/ know corporate action to that effect is coming.

To put into extreme, are you saying, we should give two companies with same valuation, one with significant cash hoard, and the other without, but both with similar ROE/ROIC/ROCE? The question comes with an assumption that the cash hoard is "free" after an qualitative analysis process.

My answer to the above is NO. I reckon your answer is YES, which I disagree.

I thought of clarifying ROIC because terminologies in finance is quite grey (maybe purposely so that people can twist and turn if they are caught LOL) but the concept shouldn't be. "free" cash per se only exist for the management and not for OPMI, unless like I said above, you can convince them otherwise.

You can't have 2 similar company, one with significant cash hoard and the other without, yet both with similar ROE when ROIC/ROCE is the same.

Take a simple example we have 2 companies that has originally the same asset that produce constant 10% cash return without leverage, the diff is company A pays out all the cash while company B doesn't. In 10 years Company A will still have 10% ROE while Company B ROE will be 5% due to the cash drag. And in fact the market will ascribe higher valuations to company A ie asset+cash payout> Company B with asset and cash withheld.

This cash drag effect is significant in our money management decisions termed as asset allocation. We can have ROIC of 100% with a 2-bagger pick but on a total portfolio basis we have 90% cash, then the ROE is only 10%.

And in the Hai Leck example, if management needs the cash to convince customers, then the cash is a form of working capital for the business. That's why net nett it is somewhat irrelevant why the cash is there because as an OPMI of the listco, that's the deal one gets regardless of the reason.