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question

Ever wondered how you could buy shares in a company on the ASX and get the business for free?

Well, theoretically you can if the company holds more cash on its balance sheet than its current market capitalisation.

Perhaps surprisingly, there are quite a few companies listed on the ASX that are in that position. But, and it’s a big but, many only hold that cash temporarily, they may also have debt – which partly or wholly cancels out the cash, or they could have just raised capital from the market or have earmarked that cash to spend.

Here’s a selection of companies that have more cash than their market cap.

Company Market Cap Cash and term deposits Debt balance
Watpac Limited (ASX: WTP) $174m $183m $32m
Karoon Gas Australia Limited (ASX: KAR) $498m $553m None
Grange Resources Limited (ASX: GRR) $122m $154m $5m
BC Iron Limited (ASX: BCI) $50m $68m $6m
Energy Resources of Australia Limited (ASX: ERA) $202m $300m None
Helloworld Limited (ASX: HLO) $130m $176m $23m
Macmahon Holdings Limited (ASX: MAH) $105m $237m $162m

Source: company reports, Capital IQ

The problem with many companies in the above list is that their cash balances stated above are only a snapshot at a certain point in time and could change dramatically and suddenly.

BC Iron held more than $150 million in cash at the end of June 2014. That has dwindled to $68m a by June 2015. Will any of it be left by June 2016 might be a reasonable question.

Grange Resources has a net cash balance of more than its market cap. But as an iron ore miner (like BC Iron), that could disappear in a flash if the iron ore price crumbles further. Grange had $154 million in cash and term deposits at the end of December 2014.

Karoon Gas holds a substantial cash balance of more than half a billion dollars. The issue with Karoon is that most of that cash will be allocated to drilling oil and gas wells offshore. Offshore oil wells can cost as much as $100 million each – and there’s no guarantee of a return.

Uranium miner Energy Resources also has substantially more cash than its current market cap. But the miner is likely to be required to spend a significant amount on rehabilitation and water treatment – having already spent $392 million since 2012.

Travel agent Helloworld also has what looks like a decent net cash balance. The problem is that as a travel agent, the company collects and holds customer payments for travel booked through the company. Looking at the annual report shows that of that $176 million, just $27.4 million of that was Helloworld’s and the rest belonged to clients.

Mining services company Macmahon had a net cash position of $74 million at the end of June 2015, thanks to a huge chunk of debt, so its cash balance in isolation is rather deceptive.

Is this one different?

Which leaves us with one company that might prove to be quite different to all the others – Watpac. A construction and engineering company, Watpac, generated 76% of its revenues from construction, with 23% coming from mining and civil (resources) in the last financial year. Interestingly, the $32 million of debt relates to equipment finance liabilities, so differs from normal bank debt.

Theoretically, if you could buy the whole of Watpac, you could find yourself in the position of having $9 million net cash in your pocket (the difference between the cash balance and market cap), no ‘normal’ debt and a real business that had $1,159 million of work in hand (WIH) at the end of June 2015. 84% of that WIH is for contracting across a diversified range of sectors including commercial, residential, education, sports, hotels and defence.

Foolish takeaway

Buying shares in a company on this basis doesn’t make much sense in the real world. For a whole host of reasons, the cash balance is simply a marker on one day of the year and could disappear the day after. However, it does sometimes highlight companies that might be worthy of more research and Watpac is one of those.

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Motley Fool contributor Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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