In the business world, cash is king and is the most liquid company asset. Cash includes company savings in the form of physical money, checks and whatever it has in the bank. Also, if a company has checks it has been paid but not cashed yet, those too are part of their cash assets.
If you are an investor, cash is one of the things you should look out for in any list of financial statements. And it would help if you calculated the percentage of cash in total assets.
Reasons to Watch Cash Assets
Generally, cash appears as the first line in a balance sheet for a reason. Studies show that cash flow is one of the most critical factors determining the success of any business. And 82 percent of businesses will fail due to cash flow problems or the inability to understand cash flow.
That is because cash enables businesses to repay their investors and expand with minimal hassle. Also, it ensures that even if a business experiences difficult economic times, it can continue operating and staying current on its payments until the situation improves. Investors do not have to worry about company assets being sold to pay off business debts.
Successful companies tend to take cash seriously. For example, Amazon has more than doubled its cash-only reserves within the past five years. It now sits on a financial arsenal worth $42 billion. Airbnb has not been left behind either. It has $5.51 billion in cash.
Calculating Percentage of Cash in Total Assets
You can determine how much cash a company has relative to its total asset base in several ways. But the simplest method is to use the common size percent for cash formula, which is common when dealing with company balance sheets.
The common size percent for cash formula requires you to take the amount and divide it by the base amount before multiplying it by 100 percent. In this case, the amount is the cash, and the base amount is the total assets a company owns. But you can use the formula for all the line items on any company balance sheet.
Below is the procedure for calculating percentage cash in total assets.
1. Develop a List of Interesting Companies
First, you need to develop a list of companies that interest you as an investor and access their balance sheets. You can get these lists from places such as:
2. Find the Cash Line Item
Once you find a company’s balance sheet, check out the cash line item. You will see this item under the current assets section, usually in the first line.
Most companies tend to separate the cash only from the cash equivalent. The latter refers to securities that can be converted into cash within three months or less, including CDs, treasury bills and commercial paper, among other things. Determine the value of the cash only.
3. Find the Total Assets Category
Your third step is to determine the total assets your company owns.
You will find the value toward the bottom of the balance sheet on the assets side. It is the sum of all the individual cash, cash equivalent and fixed assets a company owns. Goodwill, prepaid expenses and intangible assets like patents are also included in that value. However, company equity is not.
4. Use the Common Size Percent for Cash Formula
Once you have all the values, you can use the common size percent for cash formula to obtain the amount of cash a company has relative to all its assets.
For example, a corporation reported cash of $27,000, total assets of $461,000 and total equity of $157,895 on its balance sheet. Its common-size percent for cash equals:
(27,000/461,000) x 100% = 5.86%.
Therefore, the corporation has 5.86 percent of its assets in the form of cash reserves.
Companies have different cash requirements. But the general rule of thumb is that a company should have cash reserves to cater to operating business expenses for three to six months. So, you may need to dig deeper into a company’s cash flow statement to determine if its cash reserves are enough for its needs.
Alternatively, you can compare the different percentages to determine the most financially prepared companies. And then you can decide where to invest.
- Compare a company’s cash as a percentage of total assets with those of its competitors. A company with a larger percentage of cash has more financial flexibility than its peers.
- Monitor a company’s cash as a percentage of total assets over time. A significant decrease may signal future financial trouble, while a significant increase suggests the company is strengthening its financial position.
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.