Are Corporate Balance Sheets Really the Strongest in History?

Here is a good article on the myth that corporations are flush with cash and that their balance sheets are full of tangible assets.  I think I will begin reporting the percent of total assets in cash and the percent of tangible assets out of the total assets.  I like high dividend stocks with a high percentage of tangible assets.

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Are corporate balance sheets really the strongest in history?

by  John P. Hussman, Ph.D.

It is freely accepted by investors as fact that U.S. corporate balance sheets are the stronger than ever before in history. This view is largely driven by the significant amount of cash (checking deposits, savings deposits, money market funds, commercial paper holdings) on corporate balance sheets. Our difficulty with this view is that no single line item on a balance sheet is a sufficient indication of "strength." Most useful measures are derived from ratios at the very least, and ideally calculations across a variety of dimensions.

The best line item on corporate balance sheets today is typically "Cash and Equivalents." But while the amount of cash and cash-equivalents on U.S. (nonfinancial) corporate balance sheets has increased significantly, particularly relative to the cash-strapped lows of 2009, corporate cash is certainly nowhere near historical highs relative to debt. As a side note, probably the dumbest use of balance sheet data that we hear from time-to-time is when analysts talk about the P/E multiple of a stock "after you back out the cash," as if the cash line item can meaningfully be subtracted from the market cap of the equity. Really? If a company issues a billion dollars of debt, and then holds the proceeds in cash, does that suddenly make the stock "cheaper" because we can now back out that cash from the company's market cap? Um, no.

Read the rest of the article at
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Published in: on December 1, 2011 at 11:36 pm  Leave a Comment  

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