Putting Cash to WorkLocate and post a recent news story from The Wall Street Journal or other reputable source about a publicly-traded company that has been criticized for its cash management practices and/or the amount of debt it is carrying.
- What were the criticisms leveled against the company? Was it accused of being too conservative and hoarding too much cash, or of taking unnecessary risks such as being too highly leveraged?
- How did the CFO or CEO address this criticism?
- How has the stock performance been impacted by these cash management practices?
- Present three recommendations to management to address these criticisms. For example, how the company can improve cash or capital generation in the case of not having enough cash, or how the company can make better use of its cash through capital actions, in the case of cash hoarding.
Post your initial response by Wednesday, midnight of your time zone, and reply to at least 2 of your classmates’ initial posts by Sunday, midnight of your time zone.
1st person to response to
Thiago
Hello Professor JP and Classmates
What were the criticisms leveled against the company? Was it accused of being too conservative and hoarding too much cash or of taking unnecessary risks such as being too highly leveraged?
Lordstown Motors, a start-up electrical vehicle manufacturer, has been having difficulties managing its cash and could potentially run out of it soon due to unexpected high capital expenses. The company said it didn’t effectively monitor for risks nor have an adequate process in place for addressing weaknesses in internal controls. They also said it lacked a sufficient number of skilled accounting employees. The weaknesses in its internal controls over financial reporting could have caused material misstatements in its financial statements. Furthermore, Lordstown Motors posted a $125.2 million net loss in the first quarter of 2021, and with no new revenue coming in, it has run up an accumulated deficit of $259.7 million (Foldy, 1). In addition, the numbers tell the truth. Based on its financial statement, there is no revenue generated yet, and increased capital expenses (2):
How did the CFO or CEO address this criticism?
Based on Foldy’s article, the company is scrambling to raise more money to keep the business running; otherwise, it could go bankrupt. Lordstown Motors Chief Executive Steve Burns has said the company is trying to raise additional capital through asset-backed financing or a government loan program set up by Congress in 2007 and used by Tesla Inc. years ago to fund its upstart operations. Without the new funding, Lordstown Motors said it wouldn’t have enough money to scale production of its all-electric truck, which will start at $52,500 and target businesses and other commercial fleet operators (Foldy, 1)
How has the stock performance been impacted by these cash management practices?
Lordstown Motors stock tumbled from $7.98 to the current $2.75 a share (Google, 3):
Present three recommendations to management to address these criticisms. For example, how the company can improve cash or capital generation in the case of not having enough cash, or how the company can make better use of its cash through capital actions in the case of cash hoarding.
The first action must be to revise the internal process, improve cash forecasting and accounting control, and reassess its employees. The second step is to raise funds by cutting costs and concentrating cash using techniques such as cash sweeping and notional pooling. The third and last step is fundraising with debt, which falls into these categories (Bragg, 4):
– Asset-based financing.
– Unsecured financing.
– Guaranteed Financing.
Sincerely
Thiago Andrade
References:
1. Foldy, Ben. 2021. WSJ, Lordstown Motors Warning Highlights Cash Needs of EV Startups. Link:
2. https://www.morningstar.com/stocks/xnas/ride/financials
4. Bragg, Steven M., 2020. The CFO Guidebook.
2nd person to respond
Keaton,
Professor and classmates,
Below is my respond to this weeks DQ prompt regarding Aramco’s excess cash situation: Aramco’s Actions Undercut Its Rosy Predictions – WSJ
- What were the criticisms leveled against the company? Was it accused of being too conservative and hoarding too much cash, or of taking unnecessary risks such as being too highly leveraged?
Aramco is the world’s largest oil company and is predicting demand growth, but its contradictory investment plan suggest low confidence. Aramco is accused of being “flush” with cash, more than $65 billion in free cash flow in the first half of this year, but has kept cash expenditures at the lower end this year of around $40B. (1)
- How did the CFO or CEO address this criticism?
Chief Executive Amin Nasser, stated that he expected oil demand to grow for the rest of the decade and that ongoing investment was essential. However, their actions are contradictory. As stated above, their cash expenditures this year have been very low. The article speculates that if management really believes that oil demand is growing for the next decade, it should at the very least accelerate plans to expand its maximum sustainable oil capacity to 13.0 million barrels a day, currently set for 2027. Additionally, “unlike its supermajor rivals, shareholders didn’t get any bonus—there were neither share buybacks nor a dividend increase” (1).
- How has the stock performance been impacted by these cash management practices?
Overall, in the past month, Aramco’s stock has seen an increase, with slight decrease in price after the release of this article. Hard to say if there is correlation as the stock price only dipped by a few cents (2). However,
- Present three recommendations to management to address these criticisms. For example, how the company can improve cash or capital generation in the case of not having enough cash, or how the company can make better use of its cash through capital actions, in the case of cash hoarding.
The first recommendation I would suggest, and one that was expected but not reciprocated according to the WSJ article, is that Aramco return some of the excess cash back to it’s shareholders (1,3). This result can result in higher earnings per share over time. The second recommendation would be to improve or expand operations to grow the company and set themselves up for commercial success (4). The third and final recommendation would be to identify where the business is faltering commercially and reinvest its money for improvements (4).
Thanks for reading,
Keaton
References:
- Rochelle Toplensky. August 15th 2022. Aramco’s Actions Undercut Its Rosy Predictions – WSJ
- Business Insider. Aug 16th 2022. Stock | News | ARAMCO Stock Price Today | Analyst Opinions | Markets Insider (businessinsider.com)
- Times Malta. 2022. Returning excess cash to shareholders (timesofmalta.com)
4. Marquis Codjita. 2017. The Importance of a Cash Book in Accounting (bizfluent.com)
