The Value of Corporate Cash
By Nicholas Morris
Corporate balance sheets can sparkle with big cash balances and excessive current assets. The money is in the bank, it's just not a local bank. The following article explores the basis of economic value concerning cash, liquidity, and accounting statements of publicly-owned companies. Dedicated to shareholders everywhere.Growth Strategy
What is the goal of a public company? Usually a company’s highest priority is to create wealth and to return capital to shareholders and investors. Companies do this by investing capital to make money, investing in assets like plants and equipment, carry out research and development, and they also invest in other companies or buy them. Two main strategies are 1) the acquisition strategy or buyout, is quite different from 2) the organic growth strategy that builds revenue from the ground up.
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Growth requires assets and cash (also includes short-term investments such as Treasuries or CD’s. Cash is the most liquid current asset. In this article we are not looking at growth models per se, but how cash is used by different types of companies to achieve growth. Opportunities for growth vary with the firm’s industry and maturity so it is important to note industries vary greatly in how growth is acquired. Essentially, cash is most valuable when value-adding opportunities exist for the company. It’s not surprising, therefore, that cash is deemed more valuable to early-stage firms whose prospects and outlook depend on research and development and other investment expenditures to generate returns.
Many products and tools developed ten years ago have been replaced with new ones. The notion that tomorrow ideas will be more valuable than today is the essences and driver of innovation. Companies invest to get ahead and stay competitive in their industry.
Where’s the money?
When we analyze multi-national companies currently based in the U.S. we will look at their accounting methods closely to understand where revenue comes from, where it is being spent, and how returns are generated.
Tax inversions are at the heart of this discussion. The amount of corporate cash stashed overseas has been building in the last decade. To answer the above question we look at the MD&A in financial statements and we see massive quantities of cash parked on balance sheets over seas, sitting idly in a foreign bank earning very little interest.
One of the problems with the accounting process for this cash is that it is classified as a liquid current asset. Cash is the first category under current assets, usually! This cash is stashed in an off-shore account and as Twitter’s financials explained in the MD&A, ‘it is not expected to be moved or expatriated any time soon.’
Basically, the cash being held classifies as restricted cash, in the foreign bank where it is stashed. Having said this, it clearly will not be returned to the U.S., without losing a larger percentage to taxes, and therefore is not a current asset but a restricted asset that could be classified as investment capital.
TECHNICALLY - Cash flows are susceptible to liquid investment classification issues.
Look for liquid investments that do not qualify as cash equivalents and are included in cash flows from investments. Compare to cash flows from operations.
