Is it alarming if a company has a high volume of cash as an asset in its balance sheet?
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.
With Best Regards