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Friday, 30 October 2009

Is Your Company Hoarding Too Much Cash For You?

Is your company hoarding too much surplus cash and even at good times is also hoarding surplus cash? Good or bad?


I don't think this type of company is any good. Shareholders provide capital to the company and expect the Management and Board to efficiently deploy their capital into businesses to generate better returns for the shareholders and not to save their money in the banks on their behalf.

It is prudent for the company to hoard surplus cash to cushion the company during bad times. But, if the company has been habitually hoarding cash even in pretty good times, it telling us that Management is clueless on how to better deploy the excess capital and the company may have no real growth prospects and can only hoard cash in the banks. Or the company is deemed weak by the Capital markets and the Management knows that they have difficulties to tap into the Capital markets or to raise Equities from the potential investors so they have no choices but to hoard excess capital as cash cushions.

Strong companies with real growth prospects have no problems to tap into the Capital markets or raise Equities from the potential investors to build up cash reserve for strong balance sheet during bad times or to grow the company. The Management of strong companies with real growth prospects will never see the need to hoard excess capital as cash cushions.

So what have you been thinking if your company is helping you to save excess money in the bank? Still a good company? Hmm...

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