The trading performance of companies in the FTSE 100 is always under the spotlight. Details on sales, costs, and profitability can be found in the income statement of a company’s accounts. However, I think the balance sheet contains equally important information that is often overlooked.
I’m going to put this to the test by reviewing the balance sheets of Glencore (LSE:GLEN) and Ocado (LSE:OCDO), to help me decide which would make the better investment.
Why have I chosen these two companies? Because, over the past two years, the mining giant’s share price has been the top performer in the FTSE 100 (up 124%). In contrast, the online retailer’s has been the worst (down 71%).
Audited accounts
At 29 May 2022, Ocado had assets of £4.3bn and liabilities of £2.7bn. The difference between these two figures (net assets) was £1.6bn. At the time, the company’s market cap was £7.7bn — now £5.3bn due to the continuing decline in its share price.
Accounts at 30 June 2022, show that Glencore had assets of $140bn and liabilities of $95.5bn. Net assets were $44.5bn — approximately half of its current stock market valuation.
Seeing is believing
I like to distinguish between assets that I can physically touch and feel (tangible), and those that are less obvious (intangible). Although both have value, there is more judgement involved in valuing the latter. This means intangible assets could be over-stated. They are also more difficult to sell.
Nearly half of Ocado’s assets are made up of non-physical things, like goodwill and internal development costs, or assets that they lease.
In contrast, Glencore’s intangibles account for just 4% of all assets.
Cash is king
The best measure of performance is cash in the bank.
The latest balance sheets reveal that Ocado had £1.1bn of cash and Glencore had $2.6bn.
But, Glencore treats its inventories (stock) like cash. It claims that as widely available markets exist for its products, they can be quickly converted into cash. These were valued at $25.5bn at the end of June.
Liabilities
Ocado’s principal liabilities are borrowings (£1.3bn) and lease liabilities (£526m).
Glencore’s borrowings were $30.7bn.
When assessing a potential investment, I like to compare net debt (cash less borrowings) to earnings (hopefully, a profit). A ratio of three would be on the high side for a FTSE 100 company.
With Ocado, it’s not possible to do this calculation as it’s loss-making.
Glencore’s net debt is 1.3 times its 2021 EBITDA (earnings before interest, taxation, depreciation, and amortisation). Treating its stock like cash moves it to a net funding (cash greater than borrowings) position. It now makes sense why the directors prefer to classify stock in this way.
What does all of this mean?
In my view, Glencore would make a better investment.
Ocado’s valuation seems to be based more on its future prospects, rather than anything on its balance sheet, which is full of things that are difficult to value. In contrast, Glencore has assets (mines, equipment, and stock) that others would want to buy.
However, I’m not going to invest in Glencore. I already have exposure to the mining sector through a shareholding in Anglo American. In an attempt to boost my personal balance sheet, I want to keep my portfolio as diversified as possible.
