Actual Question:
Is it alarming if a company
has a high volume of cash as an asset in its balance sheet?
Answer:
Dear Friend!
Thank you for the good question.
I am a little confused about what exactly you mean by “cash”.
You could be meaning “cash and cash equivalents”, a term used in
financial conversations, which include cash, bank balances, short-term
investments, fixed deposits with banks and so on. Or you could be meaning hard
cash in the form of “currency notes”.
Cash and Cash Equivalents:
It is perfectly normal and healthy for a good company to hold
this class of asset in large quantities. The reason for generation of this cash the
company’s healthy profit margins, which in turn resulting in the consistent
generation of positive net operating cash flows - that is surplus cash is
generated from operations after meeting working capital requirements. This cash
is used for paying dividends, creating new fixed assets and when still more
cash is left after such allocations, the same is held in the form of liquid
cash and cash equivalents.
Companies accumulate cash for future expansion, acquisition of
other companies and similar strategic purposes.
Please see the table below:
In extremely rare cases like Satyam Computers, huge losses
were covered up under the head cash and cash equivalents in the balance sheet.
Cash in the form of currency notes:
Holding huge cash balances in the physical cash by a company is
certainly alarming. It is certain indicator of covering up losses by not
booking expenses.
It is unusual to see listed companies showing huge physical cash
balances, however private and shell companies used as a means for money
laundering maybe holding huge cash balances, and it is these companies that
governments pursuing black money go after.
Thank you,
With Best Regards
Anand