Zero sales test

How long can a company survive with zero revenue?  The COVID-19 crisis has forced governments to restrict movement so  restaurants, hotels and travel companies are faced with a grim scenario where revenue drops to zero.

The cyclical companies in my portfolio such as China Aviation  Oil, TripAdvisor and HRNet are vulnerable but I subjected all of my portfolio companies to this zero sales acid-test.

The table below shows how long each company can last in a zero revenue scenario and their balance sheet situation.

Zero revenue runway (days) Cash (USDm) Net cash/debt
China Aviation Oil                 6,915                    379  Net cash
HRNet                 1,022                    185  Net cash
Visa                    795               15,943  Net debt
SOG                    500                       18  Net cash
MasterCard                    418                 7,676  Net debt
iFAST                    214                       17  Net cash
TripAdvisor                    101                    319  Net cash

Here are my assumptions:

  • Runway = Cash/cash expenses.
  • Cash excludes debt and operating leases. Operating leases are already included in the denominator so I didn’t want to double count leases.
  • Cash expenses excludes variable costs such as  cost of goods sold and non-cash expenses such as depreciation and amortization.

All my companies are in a good position to endure this downturn. Most are in a net cash position while the net debt companies such as MasterCard and Visa have the option to borrow more because of their scale.

China Aviation Oil is in the strongest position which is a good thing because outbound China air travel has almost disappeared. A big chunk of their expenses is also related to the cost of oil sold so they have many levers to manage this downturn. China Aviation Oil can survive more than 6,000 days with zero revenue because of their huge cash pile relative to their cash expenses.

HRNet is in a similarly strong position – they can last a few years on zero revenue because of their massive net cash situation.  Net cash makes up 64% of their share price now. A big chunk of HRNet expenses is “other employee benefits” which is probably profit sharing bonuses so those expenses will disappear if revenue drops to zero.

iFAST has the shortest runway – the company can survive less than 1 year in a zero revenue scenario but a zero revenue scenario is unlikely . iFAST charges its clients a recurring fee based on the value of their assets so they are likely to get some revenue even if clients stop buying unit trusts and stocks. I’m a iFAST client and they seem to be getting more business volume because they are always warning about “increase in the call and email volumes”.  iFAST also has a net cash position so they always have the option to borrow cash to endure this downturn.

The platform companies in my portfolio – iFAST, MasterCard, Visa and TripAdvisor should earn recurring revenue based on transactions done within their networks. TripAdvisor is probably the most vulnerable because hotel, restaurant and attractions activity has come to a halt. There are 2 key reasons why TripAdvisor should be able to weather the storm.  60% of TripAdvisor’s cash expenses is related to marketing (TV advertising and search engine) expenses which could be reduced during a downturn. Lastly, TripAdvisor is in a net cash position and can draw on a USD1.2 billion line of credit which will buy the company a few years to wait out this storm.

I’m pleasantly surprised by the outcome of this stress-test – all my companies should be able to ride out this downturn and will be well placed to capture the upside when the economy restarts.

In short, cash is king, debt is bad and keeping expenses variable is crucial during a downturn.


3 thoughts on “Zero sales test

  1. Hi
    I am vested in V. My calculations show that the IV of V is $160. What is your opinion on this?
    What is your investment thesis on V.


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