October 24, 2016 | Dr. Stephen Timme
Recent LinkedIn headlines included an article by Christoper Mims titled, “Apple is sitting on 10% of all US corporate cash.” Wow! Really? Since the Wall Street Journal reports that non-financial US companies are collectively holding almost $1.5 trillion, that’s a lot of dough. What the article doesn’t say is whether it’s a good or a bad thing. In our opinion…and potentially counter to what your gut might tell you….a lot of cash may not always be a good thing. Good reasons to be accumulating cash:
- Strong company performance is generating returns beyond the company’s spending needs and building excess cash.
- Some industries, like software and services, entertainment, and media don’t have high capital spending needs, so the highly successful ones build cash from their success.
- Riskier businesses and industries, like technology and software for example, may need cash reserves to cover losses and rebuild from an unsuccessful product launch. These companies can often have a lot riding on the “next best thing”, and a lot of recovery required if it doesn’t go as planned (think Blackberry).
- Companies in more capital-intensive industries, like manufacturing, are often better positioned with cash reserves in place to ride out any cyclical downturns that may come their way.
Not so good reasons to be accumulating cash:
- It could be a sign that management isn’t focused on or doesn’t have time to find something better to do with it.
- The opportunity cost of too much cash could be meaningful – if, for example, the company’s cost of capital is higher than the interest the cash balance is earning….or they are foregoing growth or expansion opportunities they could be investing in for future growth and long-term positioning of the company.
And finally, even if the good outweighs the bad…..the long-term effects of too much cash might not if it results in a lack of focus on cost management, lower pressure to perform, or a lack of diligence in seeking and evaluating investment and/or acquisition decisions, just to name a few. On the other hand….a client with cash is generally a plus if you’re in sales. We get that….
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In The News
Recent LinkedIn headlines included an article by Christoper Mims titled, “Apple is sitting on 10% of all US corporate cash.” Wow! Really? Since the Wall Street Journal reports that non-financial US companies are collectively holding almost $1.5 trillion, that’s a lot of dough. What the article doesn’t say is whether it’s a good or a bad thing. In our opinion…and potentially counter to what your gut might tell you….a lot of cash may not always be a good thing. Good reasons to be accumulating cash:
