These days the economic picture in New Hampshire is one of economic boom. Dennis Delay, the chief economist for Public Service of New Hampshire was recently quoted as saying "You can't think of the economy much better than it is now". Those grim days of our recession from 1989 through 1992 or later are fading from our memories. Those were the days when everyone acknowledged that "Cash is King". Banks were dying from the lack of cash flow from their failing real estate loan portfolio's. Every business was desperately trying to preserve their cash to ride out the recession and protect themselves from failing banks. And every working citizen was looking over their shoulder wondering when their job might get the ax, leaving them in a cash bind of their own.

The pressure is off these days, you say. Interest rates are low, historically, and banks are aggressively marketing again for new loans. It seems to be a shoppers market especially if you are a business looking to fund hard assets for expansion. John Hopper, Senior Vice President at Fleet Bank New Hampshire said he has seen very strong demand for Industrial Revenue Bond financing. Jack Donovan, Director of New Hampshires Business Finance Agency echoed Mr. Hopper's comments and added that several New Hampshire banks are being very competitive and resourceful. (Bondholders of Industrial Revenue Bonds are given nontaxable interest treatment for federal and state tax purposes. This generally results in favorable borrowing rates, but the borrower is required to invest the funds in qualified manufacturing facilities and equipment.)

We all seem transfixed by revenue growth rates and P-E ratios. Just ask The Motley Fool to be sure. The stock market is amazing , and P-E ratios are reaching lofty levels. Even Chairman Greenspan seems to have bought into it all, backing off his earlier concerns about its "irrational exuberance". Productivity gains appear to be funding the steady growth rates we have achieved, allowing low inflation rates and low unemployment to coexist.

But if you read between the lines, cash is still there in the driver's seat. Dell Computer's P-E multiple is currently a whopping 32 times projected January 1998 earnings. Dell returns about 7% after tax on its nearly $8 billion in revenues. But Dell has coined the term "velocity" to explain 24 hours as the average time from receipt of order to receipt of cash, and 13 days sales worth of inventory on hand. Michael Dell, CEO, is obsessed with velocity, because it has allowed him to grow at 71% in unit terms in 1996, while improving profitability. Most noteworthy, however, is Dell's return on invested capital which was 50% in 1996, compared to Intel and Microsoft who return about 30%, and Compaq Computer, which returns about 20%. I like the quote in a recent Business Week article about Dell by its CFO - "We spent about 15 months educating our people about return on invested capital". Who said cash is passe? Dell's focus on velocity and return on investment is being reflected in the premium P-E offered for Dell's stock.

Sanmina Corporation, a world class contract manufacturer that employs about 200 people here in New Hampshire, is best in class when it comes to cash. Still a relatively small company, their revenues are running at the $400 million rate, a growth rate in excess of 50%, and they seem to return consistently 10% net income on those revenues. They are currently commanding a P-E multiple of 38 on projected September 1997 earnings. That puts them in the front of the pack in a hot industry supporting the global growth in electronics and telecommunications. But Sanmina has done a great job managing its assets in a high growth mode and also has been able to sustain a return on invested capital of nearly 30%, by far the industry leader. Maybe the premium their stock enjoys in the current market is reflecting the great job they do with ROI.

"Parts is parts", says Frank Perdue. Well, cash is cash, too. Rational Software in Santa Clara, California and Pure-Atria Corp in Sunnyvale, California are leaders in software quality tools market, an emerging industry that is seeing lots of consolidation through mergers and acquisitions. These companies are selling at multiples of their revenues despite dismal bottom lines loaded with special charges. But look on their balance sheet and you see that they have raised a ton of cash, nearly $300 million, which is more than their combined sales. On July 30, 1997, Rational Software announced the acquisition of Pure Atria in a stock exchange. Paul Levy, Rational's CEO, explained the deal, in part, as "customers are interested in doing business with vendors that offer unassailable financial strength and staying power". He is obviously making a statement with his $300 million in cash.

Fleet Bank's Mr. Hopper feels that New Hampshire businesses seem to be retaining profits and building balance sheets far better now than they did in the 80's, when there was a tendency to put tax saving strategies and owner distributions ahead of building a sound financial position. He also noted that interest in Fleets' cash management services and electronic banking has grown tremendously.

So, it looks like Cash is still King. The people that avoid resting on their growth records, the glory stuff, and continue to fuss about inventory turns, receivables collections, investment paybacks, cash management practices, margins, and expense spending will be rewarded in heaven, and hopefully here too. It is certainly paying off for Dell Computers and Sanmina Corp. And your CFO will be happy. There is still nothing quite like a stash of cash and no debt.

John Hastings is President of J.H.Hastings & Co. Inc., a Hopkinton, NH firm providing financial management on an outsourced basis to small businesses in New Hampshire. WEB: http://www.jhhcoinc.com E-mail: johnh@jhhcoinc.com

Article Reprinted by permission of NH Business Review

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