Cash Rich or Cash Poor?: You Decide

What is not
so clear is whether this increasing cash pile – as outlined in Figure 1 below
showing trends in cash over recent years – is ‘enough’ to continue to pay
liabilities when they come due or allow the companies to compete against others.
After all having ‘more’ is not exactly the same as ‘enough’.


Figure 1: Selected Financials for US
S&P500 Non-financial Companies at 30 June 2013

Cash rich and cash poor figure 1

Source: The
American Association of Individual Investors (AAII)


Whether a
company is cash rich or cash poor depends on how a company decides to match up its
sources of cash with uses, today and in the future. Also third parties, such as
investors and banks, get a vote. Examples include the following:

  •  Apple
    has over US$88bn in cash and cash equivalents on hand – more than most other
    companies – yet was forced to borrow when an investor demanded that it pay
  • Companies
    such as Bear Sterns, Lehman Brothers and MF Global assumed they had enough cash,
    until their counterparties actually started demanding it back.
  •  Total
    external debt for the S&P 500 has increased faster than cash. While not all
    of this debt is due, immediately rising levels may give companies pause about whether
    they have enough cash for operations today, the ability to fund business investments
    and repay debt to in the future.
  • Cash
    flows have been volatile and have been declining over the past few years. Lack
    of cash flow and the spectre of future debt repayments could cause some
    companies to defer spending to build more cash balances in the future. Investor
    reaction to this balancing act could affect company values.

Most would
agree that cash on hand is just one of the components to consider when
determining if sources of liquidity match uses of that liquidity. Other
components of liquidity include the frequency and amounts by which cash
balances are replenished – either from an operating source (i.e. operating cash
flow) or by accessing the capital markets (i.e. financial cash flows); why
these liabilities were incurred (to achieve profits?); how they will be paid (from
operations? more borrowings?), when they will be paid and what must be sacrificed
to do so (priorities) – all can determine if the market considers a company to
be cash rich or cash poor. 

Why is being
cash rich or poor important? Simply put, in a capitalistic environment cash
poor companies have less control over their business future because they are
more exposed to market forces and incur a greater risk that expectations will
meet actual results; cash rich companies have more control/more alternatives,
which allows them to generate more value over time for their investors. The
real issue is to understand what levels of liquidity are required to be
considered cash rich or poor. 

An Individual Judgment

There is no
right answer to the issue of enough liquidity or too much risk. All is
relative; however, there are some profitability, liquidity and risk metrics
which can be used to as a ‘starter set’ to answer the question ‘is my company
financial successful?’

  • Postive EBITDA: Earnings before interest, tax,
    depreciation and amortisation (EBITDA) is a measure of operating earnings and is
    prized by ‘the Street’ because more usually leads to increasing stock values.
    It has its shortcomings since it assumes that borrowings/interest expense, foreign
    exchange (FX) exposure and taxes are not important to a company’s operations
  • Positive free cash flow: EBITDA can be considered a forecast
    of future operating cash flows, but if these flows are to be enough then they
    must pay for ‘must haves’ such as capital expenditure (capex) and dividends required
    to meet longer term business needs and investor expectations. With positive
    free cash flow (i.e. positive operating cash flow less capex and dividends) a
    company can think about other best uses, like paying down debt or acquiring complimentary
    businesses. After all, a company that cannot produce enough operating cash flow
    to re invest in its’ future is most likely in the wrong set of businesses and will
    disappoint either its investors’ need for dividends or its banker’s
    expectations of repaying debt when it comes due. Disappointments such as these
    can make a company non-competitive or even threaten its existence in the long term.
  • Cash on hand: or trying paying your payroll with
    ‘profits’. Having the right levels of cash in the right currencies has many
    benefits, such as giving management a stronger negotiating position with creditors
    and vendors. How much cash to maintain on hand can depend on the length of a
    company’s operating cycle and the duration of its liabilities.
  • Ability to borrow: Having access to more cash is almost
    as good as having it on hand, although one’s borrowing capacity is often
    determined by external parties rather than management. Also, there is a real
    cost of borrowing which could vary based on market forces not under management
    control. Most banks want their customers to maintain a low debt/equity leverage
    ratio; however, investors can be less demanding if they believe that more financial
    leverage leads to more EBITDA.
  • Length of cash conversion cycle: Companies that quickly purchase
    process and then convert sales to cash while controlling the expense of doing
    so can operate with less cash on hand because they are able to replenish/add to
    that cash level in less time. Cash conversion cycle times can change,
    especially if the company is stocking up for an expansion into new markets, or will
    be introducing new products demanded by its customers
  • After tax cost of funds: As with any goods, funds purchased
    by a company should be procured at the lowest all-in cost over the time period
    under consideration. The costs of funds should include costs to acquire funds
    from third parties as well as the cost to ‘operate’ those funds by areas like audit,
    tax and treasury, which are responsible for allocating funds to business units based
    on best uses.

 The Measure of Success

companies peer into the haze which represents the 2014 business environment,
their ability to declare ‘success’ will depend on management’s ability to
define, measure and manage results across its portfolio of businesses. Sometimes
the right definitions and the metrics to measure success can best be set by learning
from the ‘other guy’ (i.e. a company’s competitors). After all the correct balance
of profitability liquidity and risk needed to increase company value is as much
determined by management as by investor desires.

Figure 2
below shows which companies among the S&P 500 could be considered cash rich
/ poor by industry sector based on their 6/30/13 results according to the following
metrics that reflect an integrated view on profitability, liquidity and risk.
The list following the chart highlights the top / bottom 10 non financial
companies among the S & P 500.


Figure2: Who is Cash Rich or Cash
Poor in the S&P 500?*

Cash rich and cash poor figure 2

*Based on
the 432 non-financial companies as at 30 June 2013

Source: The
American Association of Individual Investors (AAII)


  • Profitability: Positive EBITDA is a good indicator
    that positive cash flow will occur, assuming that various assumptions about
    sales, expenses and various accruals are accurate.
  • Liquidity: Positive fee cash flow demonstrates an ability to internally fund important uses of cash, such as capex and dividends.
    Cash on hand – cash flow occurs over
    time. Having cash on hand today insures current liabilities are paid promptly.
    Companies often maintain cash levels in relation to current liabilities. This relationship
    can be expressed in number of days. As of 20 June 2013 the average S&P 500
    non-financial company had approximately 33 days’ cash on hand.
  •  Risk: Companies often leverage their value
    by accessing the debt markets to acquire funds now, rather than wait for them
    to accumulate in the future. The market often looks favourably on the use of
    this ‘force multiplier’ unless the ratio of debt to equity in the judgment of
    the counterparties becomes ‘excessive’, potentially jeopardising the repayment
    of these debts. As of 30 June 2013 the average S&P 500 non-financial
    company had a debt/equity ratio of 1.3

Based on
the metrics above, Figure 3 highlights the companies within their respective
industries that could be considered cash rich or cash poor.


Figure 3: Cash Rich and Cash Poor
S&P 500 Companies by Sector

 Cash rich and cash poor figure 3

Source: The
American Association of Individual Investors (AAII)


There is no right answer about how much liquidity is enough except to say that
more liquidity allows a company to immunize itself from market forces that
could jeopardise its market value. Also, comparison to the competition about
how much liquidity is enough are inevitable and that ‘the market’ gets a vote
about who are cash rich or cash poor.

For those
planning for 2014 the important take away from this article is that liquidity
counts and metrics will be needed to measure results. After all, what gets
measured gets managed.




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