Please respond to the post below on whether you agree with their view or not and why you feel this way. Must be at least two paragraphs.
Some common sense talking points are moving around in our discussions this week. As always there are very solid themes coming to the forefront. Ben McClure writes for Investopedia, and I think some of his ides here are valuable to this discussion. The question of too much cash really depends on how the cash got there, what kind of business this is, and what managers are going to do with cash on hand.
There are cases when cash is good. Keeping extra cash can make a company look good to some investors. It makes a company look strong. If money is accumulating really fast, it might attract more people. There is a need for strength and optimism among many investors. Out text and others talks about the dangers of having too much cash available. A prudent business should keep enough to cover emergencies, along with interest, expenses, and capital improvement expenditures. Beyond that, extra cash might be considered an opportunity lost if sitting on it instead of investing means little if no returns. Perpetually keeping large sums on hand without using any of it might make a firm look lazy. "Why isn't all that cash being used?" should be part of a smart investor's questions. Companies that hold excess cash carry agency costs whereby they are tempted to pursue "empire building". Top managers can fritter away cash on wasteful acquisitions and bad projects in a bid to boost their personal power and prestige (McClure, 2015). Some companies might lose control of spending and get sloppy with all the extra money. It might even lower the need to produce among employees and managers which could lead to downfall.
With this mind, be wary of balance sheet items like "strategic reserves" and "restructuring reserves". They are often just excuses for hoarding cash (McClure, 2015).
Different kinds of companies may need more money at different times. Highly successful firms in sectors like software and services, entertainment and media don't have the same levels of spending required by capital-intensive companies. So their cash builds up (McClure, 2015). By contrast, companies with a lot of capital expenditure, like steel makers, must invest in equipment and inventory that must be regularly replaced. Capital-intensive firms have a much harder time maintaining cash reserves. Investors should recognize, moreover, that companies in cyclical industries, like manufacturing, have to keep cash reserves to ride out cyclical downturns. These companies need to stockpile cash well in excess of what they need in the short term (McClure, 2015).
Should a firm have too much, they have options like dividends and redistribution to stockholders. Spending it on acquisitions and expansion are also considerations. On balance, I think the fundamentals within our text are sound and make the best of many situations. Looking at an individual company, its performance, balance sheet and how it stacks up within its own industry are all sound research considerations.