What I find interesting is that the financial pornography like CNBC, FoxBusiness, Financial Times, WSJ, and all the other mainstream folks still mention every know and then that corporate cash on balance sheets at their all-time highs since World War II.
I, too, have been plagued by this comment thinking, "Hey, perhaps all the money that's been pumping into the system from the Federal Reserve is going to paying down debt and increasing liquidity in non-financial firms.".....WRONG!
While the cash on balance sheets has been increasing (on an absolute standpoint), however, relatively speaking, the other liability side of the balance sheet has been dramatically increasing. Since interest rates have been at all-time lows, CFO's tend to believe it makes sense to lend out on all ends of the yield curve assuming rates can only go up from here. This idea makes sense only if the cash is being used to invest in projects that create positive NPV (Net Present Value). Given all the uncertainties in the market and inflation, one would have to apply a larger discount rate to their projects making it more difficult for executives to want to invest in their company. This is a very simple content, yet very applicable to the times we are dealing in today.
With that being said, I believe that shareholders are currently commending management with much higher stock prices in the last two years, however, C-level executives will need to start to put that cash to work. And when that happens, the risk factor will increase even more since the debt levels have been on the rise. If the Federal Reserve starts to increase rates and we have a shock in the yield curve, expect stock prices to drop dramatically to those firms that are once again overleveraged.
Enjoy the article below that was printed nearly one year ago, however, I don't believe this information is stressed enough to the general public investor.
http://www.businessinsider.com/about-those-supposedly-strong-corporate-balance-sheets-2010-8
Take care & Avenge!
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