I don’t know much about balance sheets, but I do understand that cash on your balance sheet is neither a good thing or a bad thing. The NY Times is running a piece describing the increased savings of cash for many corporations. The article is called Unlike Consumers, Companies are Piling Up Cash.
My initial understanding of cash on the balance sheet is that it is good because it gives you some flexibility with any maneuvers you are considering. A deal to acquire an up and coming competitor is an example. But the negative side of it is that your stock holders aren’t being rewarded by having cash on the balance sheet. Cash accumulates interest slower than value investments. And if no value investments are worth the use of the money then a dividend is expected. Cash is really representable of the job your executive management is doing – it is their job to use the resources available to them to grow the company and increase the value of the stock.
A reason given for carrying cash on the balance sheet is the increase in risk in a global business environment. Because cash acts as a buffer it is valuable against risk situations. But the article points out that as the world transitioned to a global marketplace, risk tools also evolved. So are the tools inadequate? Is the global risk out pacing the innovation of the tools? Or maybe it is psychological?
What disappoints me is from about the 2002 time frame until recently, productivity was surging, but income wasn’t following suit. Much of the productivity gains went to executive’s incentive deals, or at least I thought it did. Some of it is sitting in a bank account. It just isn’t the common worker’s bank account.
1998 Cash Holdings on Balance Sheets – $203 Billion
2008 Cash Holdings on Balance Sheets – $600 Billion
Over the same period, corporate debt leveled off. I wish I could say the same about consumer debt.