In Ovid's Fasti, the protagonist asks the god Janus why he favors cash above all the other gifts at his altar, to which the deity replied, "How little you know about the age you live in if you think that honey is sweeter than cash in hand."

In other words: Cash talks and everything else walks.

Put the cash to work
Likewise, a company with a significant amount of cash on its balance sheet is attractive to investors in many ways. For instance, cash allows a company to:

  • Improve its debt rating, thus reducing its cost of capital.
  • Begin or increase dividend payments.
  • Repurchase undervalued shares.
  • Fund R&D projects even in a down market.
  • Make strategic acquisitions.

Too much cash, however, can be a bad thing, since it earns a minimal return and is thus a poor use of investor capital. And for better or worse, large amounts of cash on hand also make a company an attractive takeover target.

Let's make mo' bucks
To help us determine which cash-rich companies deserve your attention, we'll enlist the help of 98,000 investors participating in Motley Fool CAPS and the new CAPS screening tool. Among other things, we'll look for companies with at least $5 cash per share, a return on equity above 10%, and a four- or five-star CAPS rating.

Here are five of the results:


Cash Per Share / Recent Price

CAPS Rating (5 Max)

American Railcar (Nasdaq: ARII)

$14.27 / $20.59


JAKKS Pacific (Nasdaq: JAKK)

$8.44 / $24.82


Sotheby's (NYSE: BID)

$5.16 / $25.54


Nasdaq OMX Group (Nasdaq: NDAQ)

$9.53 / $37.37


Terra Industries (NYSE: TRA)

$7.69 / $41.85


*Data provided by Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS, as of April 23, 2008. Cash-per-share figures as of the company's most recent SEC filing using shares outstanding on filing date.

It's important to note that while each of the companies on this list is highly rated, they are offered here not as formal recommendations, but rather as starting points for further research.

Sotheby's gets stuck with the bill
The 264-year-old auctioneer Sotheby's has fallen on hard times since hitting its all-time high of $61.40 in October -- shares have subsequently fallen nearly 60%.

So here we have a stock with about 20% of its market value in cash, a price-to-earnings ratio of 7.9, and a 2.3% dividend yield. On the surface, it sure sounds like a value play, but is it a value trap?

First, let's take the market's perspective. Surely there must be a reason for a 60% haircut, after all.

The stock's decline began back on Nov. 8, following terrible results from a major auction involving a Gauguin painting that sold for less than expected and a Picasso and van Gogh that went unsold altogether. The market reacted by sending shares down 30% in one day. Concerns about the sustainability of the hot contemporary art market, which produced $1.34 billion in sales for Sotheby's in 2007 alone, probably remain at the front of investors' minds, however, and shares have continued to plunge.

CAPS investors, on the other hand, largely think Sotheby's has been beaten up enough and is poised for a comeback -- of the 340 investors who have rated the stock, 94% think it will outperform the S&P 500 going forward. One such bull is alexvb, who argues, "Because Sotheby's caters to the super wealthy around the world, they are not [affected] very strongly by the sag in the US's economy."

Another bull, Capsperson, takes it a step further and provides insight into the auction market:

It's not just a matter of there always being rich people, and those rich people wanting to collect art, it's a matter of what art is put up for auction and the resulting sale. For the next quarter Sotheby's has quite an exciting catalog of upcoming auctions throughout the world including a nice share of Impressionist art which always fetches phenomenal money.

But the Sotheby's bears aren't afraid to voice their opinions, either. Thomasgb, for example, questions Sotheby's cash collection efficiency: "Bidders who win are being allowed to wait longer to pay and Sotheby's is guaranteeing minimum prices to sellers that they must pay if the artwork doesn't reach that price at auction."

Sotheby's cash conversion cycle increased from 197 days in 2006 to an astounding 317 days in 2007. According to the most recent 10-K, this was primarily due to "a $243.2 million net increase in amounts owed by clients to the Company" and "an $84.9 million net increase in inventory principally due to the acquisition of property under auction guarantees that did not sell at auction during the year."

Sotheby's has to approach this issue carefully, particularly in a shaky global economic environment. Client retention is paramount in the competitive auction market, so sternly demanding quicker payment from uber-wealthy clients could turn those clients to other auction houses. Moreover, the weak dollar has drawn more foreign investors to the auction block, and collection of those funds could present additional obstacles. Investors would be wise to do further research into Sotheby's efficiency improvement plans before hanging any share certificates on their walls.

What do you think about Sotheby's, or any other stock for that matter? Make your voice heard on Motley Fool CAPS, where 98,000 other investors are waiting to hear what you have to say. CAPS is 100% free, so what are you waiting for? Get started today.

Nasdaq OMX Group is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Todd Wenning hopes to be the proud owner of a T206 Honus Wagner baseball card one day. He does not own shares of any company mentioned. The Fool's disclosure policy is priceless.