Cash analysis revives lazy balance sheet gambit

Shereel Patel
New research by Deloitte titled "The Australian Cash Paradox" highlights the pressure that ASX listed businesses face from shareholders and financiers to continually optimise the deployment of capital and to maximise returns.

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ASX200-cash-reserves(Deloitte),26-2-15,310x173px(300dpi)

Deloitte Australia recently analysed the cash reserves and spending patterns of the 200 largest companies on the ASX. Collectively, this group (excluding companies in the financial services sector) held almost A$70 billion in cash reserves in 2014.

The ratio of cash reserves held between companies holding large and small cash balances remained broadly at 3:1 over the last decade.

"Both [types of companies] have increased their capital expenditure in recent years, although at different rates. However, when we compared capital expenditure as a percentage of cash reserves we found that this ratio was lower for the large cash holding companies," the Deloitte report noted.

 "Importantly, the cash-rich corporates have been underperforming by a factor of three since the GFC, compared to companies with relatively small cash-holdings, measured either by quarterly revenue growth or share price performance," observed,Deloitte mergers and divestments director Lee Dryden, who co-authored the report.

Companies holding small amounts of cash have experienced higher revenue growth since 2009 - a five-year compound annual growth rate of 6.5 per cent, compared to 1.9 per cent CAGR over the same period for cash-holders with large account balances.

More striking is the relative share price performance of the two groups. A clear divergence of performance exists from 2009, with small cash-holders producing better returns.

"Remarkably, the gap widened even more after the GFC, suggesting that in the long run, financial markets are rewarding companies that take a bullish attitude towards growth," Dryden said.

While Deloitte aren't likely to name names, Banking Day can point out that US major JP Morgan is likely to take this trend one step further, and will inform its largest corporate clients that their money is no longer wanted.

Citing an address to investors by Marianne Lake, the bank's chief financial officer, the Financial Times reports that these so-called "non-operating deposits", which account for about US$200 billion of JP Morgan's US$390 billion in deposits from financial institutions, "provide minimum net income and provide no liquidity benefit". Lake described winding down the balances as a "rational economic decision".

JP Morgan is therefore, the FT reports, urging some of its biggest customers to take their cash elsewhere or be hit with fees, saying that holding very large deposits was too costly under the new liquidity rules.