Why Do Companies Carry So Much Cash On Their Balance Sheets?

by Hank Coleman

understading companies' balance sheetsA balance sheet of a company is where records of how much money the company has, how much debt it owes, and what is the remaining amount for the stock holders. It is a financial statement which lets investors know where the company stands with its financial accounts.

If you want to keep track of how well the company you have invested in is doing and if they are in good status, you might want to check out the balance sheets of those companies.

How Balance Sheets Are Constructed

But if you are new to looking at these things, it is important to know a little something about balance sheets. The first thing you will see and notice in a balance sheet is the asset column wherein the total assets of the company are stated.

Under this column, you will see a section for current assets where all the properties of the company that can be converted to cash in a short span of time are listed. These properties which can easily be converted to cash are also called liquid assets.

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Basically, they are made up of cash and cash equivalents. Cash equivalents, in the simplest of terms, are the amount of money available to the company that can be quickly converted to cash to pay a company’s bills.

Why Companies Have A Lot Of Cash On Their Balance Sheets?

You will notice that many companies have turned to carrying extra cash on their balance sheets, and the trend has increased over the past several years. Some of these cash is actually borrowed money from the bank, and other cash deposits are saved from everyday operations.

Like many American families, the recession of 2008 has a lot of companies spooked. These publicly traded companies have turned to stockpiling their cash for a rainy day after many have learned their lesson by not having enough set aside during the recession.

Many companies also keep a hefty cash reserve to pay dividends and in some cases buy back shares of their stock on the open market. But, most of all, they keep cash on hand in order to have extra money in case the company needs a little financial back up.

Extra cash on their balance sheets make sure that companies have a little extra to run to whenever their earnings are not good enough to maintain or expand their business. Businesses put away and save some cash for the rainy days.

Then again, borrowed money that shows on the balance sheet is not really as good as the actual cash and cash equivalents of their assets. When looking at balance sheets, it is best to carefully study and know if the declared cash and cash equivalents are from real assets earned through the business’ operations and income, or if the extra cash is comprised of borrowed money from the bank.

Understanding a company’s cash flow will help investors to understand the underlying principles of the business and where it is headed.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.

Hank Coleman has written 578 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.

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