What you need
- A free stock screener that offers price-to-cash and debt-to-equity filters. Finviz's free screener is one example; most free screeners have similar fields. No paid product is needed for this step.
- Access to SEC EDGAR to pull each company's latest 10-Q and 10-K.
- A spreadsheet with one row per candidate and columns for cash, investments, debt, leases, diluted shares, quarterly burn, catalyst and date.
- About an hour per candidate for a first pass through the filings.
Step 1: Screen for candidates
Set two filters to start:
- Price-to-cash below 1. This compares market cap with cash per share. A value below 1 means the company is priced below its cash.
- Debt-to-equity below about 0.1. This removes companies whose cash is offset by borrowing.
Add a minimum market cap or average daily volume filter if you need to be able to trade the shares. Export or note the results.
Treat this list as a rough draft. Screeners often lag a quarter, count restricted cash, miss convertible notes, or misread foreign filers. Expect most names to drop out in the next two steps. The point of the screen is to narrow thousands of tickers to a few dozen worth reading.
Step 2: Pull the latest 10-Q balance sheet
For each candidate, open the company's most recent quarterly report on EDGAR. A 10-Q is due 40 days after quarter end for large accelerated and accelerated filers and 45 days for smaller filers. If the quarter has ended and the 10-Q is not yet out, note the expected date: the next balance sheet may look quite different.
From the balance sheet, record:
- Cash and cash equivalents
- Short-term investments (marketable securities)
- Long-term investments, if they are liquid government or corporate bonds
- Short-term and long-term debt, including the current portion
- Operating and finance lease liabilities
- Preferred stock, if any
Then check the cover page and the earnings per share note for the share count. The guide on reading a 10-Q for special situations explains where each item sits.
Step 3: Compute net cash per share
Use this formula:
Net cash = cash + short-term investments + liquid long-term investments minus total debt minus preferred stock
Net cash per share = net cash / diluted shares outstanding
Worked example (illustrative figures, hypothetical company). Company A reports $120 million in cash, $40 million in short-term investments and $10 million in debt. It has 20 million diluted shares and trades at $6.00.
- Net cash: $120M + $40M minus $10M = $150M
- Net cash per share: $150M / 20M = $7.50
- Price-to-net-cash: $6.00 / $7.50 = 0.80
On the balance sheet, Company A trades at a 20% discount to its net cash. Run the number both with and without lease liabilities. If the conclusion changes, the leases matter and belong in the calculation.
Step 4: Adjust for cash burn until the next catalyst
A stock trades below cash mostly because investors expect the cash to shrink. Quantify that.
Take operating cash flow plus capital expenditure for each of the last four quarters. If the sum is negative, that is the burn. Divide by four for a quarterly rate, or use the latest quarter if the trend has changed.
Continuing the example, Company A burns $12 million a quarter. Management has said a strategic review will conclude in about three quarters.
- Burn until the catalyst: $12M x 3 = $36M
- Adjusted net cash: $150M minus $36M = $114M
- Adjusted net cash per share: $114M / 20M = $5.70
At $6.00, Company A now trades above its adjusted net cash. The apparent discount was the cost of waiting. This is the step that removes most candidates, and it is the one screeners never do.
Step 5: Check off-balance-sheet liabilities and dilution
Read the notes to the financial statements and the risk factors. Look for:
| Item | Where to find it | Why it matters |
|---|---|---|
| Restricted cash | Cash note, balance sheet | Cannot be returned to shareholders |
| Purchase commitments | Commitments and contingencies note | Future cash already promised |
| Litigation | Legal proceedings, contingencies note | Settlements can consume cash |
| Severance and change-of-control pay | Proxy statement, employment agreements | Paid out in a sale or wind-down |
| Lease obligations | Lease note | Fixed payments that outlast operations |
| Warrants and convertibles | Equity and debt notes | Add shares and reduce per-share value |
| Shelf registration or at-the-market program | Recent S-3 filings, equity note | Shares can be sold below cash |
Subtract the cash items from adjusted net cash. Add the dilutive shares to the share count if they are likely to be exercised or converted. A company with an active at-the-market program and a large burn may be issuing shares below its own net cash, which destroys value for existing holders.
Also check where the cash sits. Cash held by foreign subsidiaries may face taxes or restrictions if brought home.
Step 6: Check for a catalyst
A discount to cash can last for years if nothing forces the cash toward shareholders. Look for a specific, dated event that could close the gap. Common ones:
- A plan of liquidation or dissolution
- A tender offer or large buyback
- A strategic review with a stated end date
- A sale of the company or a major asset
- An activist investor with a 13D filing and stated demands
- A reverse merger, which can be a negative catalyst if terms are poor
Read recent 8-Ks, the proxy statement and any 13D filings. The article on what a stock catalyst is covers how to judge timing and credibility. If there is no catalyst, record the company as a watch item rather than a thesis.
Many below-cash stocks with a defined catalyst are special situations, where the outcome depends more on a corporate event than on the business cycle.
Step 7: Record the thesis with a date
Write a short entry for each name that survives:
- Date and share price when you recorded it
- Net cash per share, adjusted net cash per share, and the filing they came from
- The catalyst and its expected date
- The two or three things that would prove the thesis wrong, such as burn rising above a set level, a dilutive raise, or a value-destroying acquisition
- The date you will revisit it, usually the next 10-Q
The date matters more than it looks. Without it, you cannot tell later whether a thesis worked, failed or simply ran out of time. Dombey's published research records each thesis with its date before the catalyst; see the research archive.
Common mistakes
- Trusting the screener. Screener cash figures often include restricted cash or long-term investments that are not liquid, and debt fields can miss convertible notes.
- Using a stale balance sheet. A company burning heavily can lose a large share of its cash in one quarter. Always use the latest filing.
- Ignoring burn. Net cash today is not net cash at the catalyst.
- Skipping the notes. Commitments, litigation and change-of-control payments do not appear as debt.
- Ignoring management incentives. A board that is paid to keep operating may never return the cash.
- Confusing below cash with below book. A stock below book value may still trade well above its cash. The tests answer different questions.
- No exit plan. Without a dated catalyst and a stop condition, a cheap stock can stay cheap indefinitely.
Where this goes wrong
The process finds companies the market already doubts, and the market is often right. Cash-rich companies with failing products can spend everything before a sale. Boards can pursue reverse mergers or acquisitions that leave little for current holders. Liquidations take longer and cost more than planned. Small, illiquid stocks can be hard to buy and harder to sell. A stock below net cash is a starting point for research, not a margin of safety by itself.
The bottom line
Finding stocks below net cash takes a screen, the latest 10-Q and some careful arithmetic. The real work is adjusting the headline number for burn, hidden liabilities and dilution, then asking what event will move the cash to shareholders. Most candidates fail one of those tests, and that is the purpose of the process. Record the survivors with a date, the numbers and the conditions that would prove you wrong.