No. of Recommendations: 5
if the business is stressed and they need to raise cash fast, they may not be able to sell these assets quickly, or at all.

In that case they are toast. Yet, this scenario is very rare short of impending bankruptcy. The idea that companies are much more secure because, on paper, their tangible book value seems substantial as opposed to companies with negative tangible book value can be quite misleading without considering the bigger picture.

Thinking of Ollie’s for a moment, if a company (Ollie’s) has healthy free cash-flow and growing earnings they are likely to be able to borrow at reasonable rates on this basis alone. Think of two individuals, one owns a home that is worth a million dollars, but he has little income. The other rents his apartment but has a large, growing, and secure income. Who is the better bet to a lender? It is not necessarily the man with “assets” and a scant income.

To my mind it’s mainly valuation that makes Ollie’s a pass. Longterm debt is just over four times net earnings; not great but probably fairly manageable given healthy and rising earnings.

Some great businesses are serial acquirers with large amounts of “goodwill and intangibles” and consequently a negative book value. When all is said and done it’s earnings that count.

But I agree, Ollie’s has no safety net given a significant and enduring earnings fail. But, considering the business they are in I think this is probably unlikely short of a deep recession.

kelbon
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.