We all know that "cash is king" these days. As investors continue to change the ways they look at companies, clearly they appreciate more than ever substantial cash reserves on the balance sheet of companies in which they invest. Unfortunately, appearances and reality aren't always the same. While a company may show a large cash balance, often there is something on the other side of it, whether it is debt or some other liability.
Imagine a company that has no debt and no cash. It sells a bond to the public and pockets the cash. Is it richer or in any better long-term financial situation than before? No! There are many examples of non-debt liabilities that can act as claims on cash, like deferred taxes or deferred revenue, and there are asset impairments (such as AR or Inventory ) that can create a short-term claim on cash as liabilities must be met. A whole other issue is that often cash is domiciled off-shore or restricted in some way. Suffice it to say, the reported cash is never understated and often potentially overstated.
I wanted to look at some "cash rich" stocks, so I took all of the S&P 500 companies with $5 billion or more in "cash and short-term investments". To see if there were claims on that cash, I compared the current assets (CA) and the current liabilities (CL). I then defined the notion of "free" cash by crediting all of the cash in excess of the difference of CA and CL, up to the amount of cash. So, for example, if a company has $1 billion in cash and its CA exceeds its CL by $1.5 billion, then all $1 billion of its cash is "free". On the other hand, if its CA exceeds its CL by just $300mm, then it has "free" cash of just $300mm. While this isn't scientific by any means, it gives a general sense of how available the cash might be.
The 30 stocks are sorted by cash as a percentage of market capitalization. Note that I did make an adjustment to both United Health (UNH) and Lilly (LLY) for long-term investments. I considered that adjustment only for companies whose cash appeared to be a mirage (so, UNH was ok after the adjustment). The results of this analysis indicate that Lilly (LLY), Procter & Gamble (PG), Verizon (VZ) and Wal-Mart (WMT) aren't as cash-rich as a naive analysis might imply. The bigger takeaway is that investors need to dig deeper than just looking at stated cash.