The Cash Ratio Red Flag: Cash Hoarding vs. Cash Efficiency
Cash is comfort. But too much comfort, Holmes often warned, makes for poor detectives — and even poorer capital allocation. Our investigation today isn’t about fraud, but about financial complacency masquerading as prudence. Welcome to the curious case of the cash ratio.
“Watson, cash is neither a virtue nor a vice. It’s what one does—or doesn’t do—with it that makes the tale worth telling.”
The Cash Ratio: Blessing or Burden?
Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities
It’s a strict test of short-term solvency, but high values can be misleading. Why? Because while it assures us bills can be paid, it says nothing of whether cash is being put to productive use. Excess cash might reflect uncertainty, risk aversion, or simply a lack of strategy.
Global Case Studies: Cash-Rich or Cash-Strained?
| Company | Region | Cash Ratio | Behavior | Red Flag |
|---|---|---|---|---|
| Apple | USA | 2.05 | Cash pile > $200B; slow repatriation | Criticized for under-investment |
| Toshiba | Japan | 1.70 | Cash hoarded amidst scandals | Signal of risk aversion, not health |
| Infosys | India | 2.2 | Huge cash reserves with low debt | ROE impacted; investor pressure for buybacks |
Cash Ratio vs ROE
Common Cash Misconceptions
| Assumption | Reality |
|---|---|
| High cash = strong business | May signal indecision or fear |
| Cash protects during downturns | Only if it’s deployed effectively |
| Cash-rich = profitable | Depends on returns, not reserves |
Other Curious Cash Cases
- Berkshire Hathaway: Over $130B in cash; Buffett criticized for sitting on dry powder
- Alphabet (Google): Significant cash but cautious M&A and limited dividends
- Cash-strapped Evergrande: Reported high cash but lacked liquidity to meet obligations
Detective’s Note 🕵️
- Cash ratio over 1.5 is worth probing. What’s the plan for deployment?
- Check ROE and ROIC trends to measure efficiency of capital use.
- High cash can mean strength — or signal red tape, fear, or stagnation.
- Read footnotes on restricted cash, and watch for patterns of inaction.
“When you have eliminated the impossible, whatever remains, however improbable, must be the truth.” – Sherlock Holmes