Why Cash Isn't Always King

- Simon Brown

I like cash and I like companies that have cash. But what if they have too much? In other words: a lazy balance sheet. Now first, let me explain why too much cash is lazy.

Return on equity (RoE) is a popular metric for measuring a company’s, as well as its executives’, performance. More cash means more assets, and therefore increases the equity part of the equation. With higher equity, the return will decrease if all else remains the same. More cash will also boost the net asset value (NAV).

Now certainly we could argue that shareholders can – and should – look through this issue and discard some or even all of the cash when determining various fundamental ratios.

But the point is that cash is inherently lazy as it generates a modest rate of interest at best. We may want a company to grow profits and dividends by double digits, but cash is likely to be earning well below that level – hence me calling it lazy.

What should companies do with extra cash?