Tuesday, 29 December 2015

Super-profitable companies with too much cash pile up on the balance sheet. Be proactive.

Company ABC

It has no long-term debt.

Its current ratio is around 4; rather high for a company with no debt to worry about.

It has consistently kept around 15% of total assets in cash.

One thing to watch with super-profitable companies is that they don't let too much cash pile up on the balance sheet.

It is fine for a company to build a temporary war chest if it anticipates big investments sometime in the next few years.

Cash that sits around of the balance sheet for a long time is not being used efficiently.

If you see cash as a percentage of total assets rising year after year for a firm that is already in find financial health, try to find out why management is not:

  • buying back stock, 
  • paying a dividend, or 
  • reinvesting it in the business.  

Any of the three are preferable to letting the cash account balloon.

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