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General Electric & the Notion of Cash on Corporate Balance Sheets

August 2, 2011

General Electric and the notion of Cash on US Corporate Balance Sheets

Addition on 30th Nov 2011 : Purveyors of the “Cash on Balance Sheet” thesis might note that when AMR, the parent of American Airlines filed for bankruptcy yesterday, it had $4.1 billion of cash on its balance sheet.  From the Chapter 11 filing, the following information could be gleaned-  Assets- $24.7 billion, Liabilities- $29.55b.  Thay is, without even considering this querulous blogger’s views on the stated valued of AMR’s assets.  

Addition on the 8th of December 2011:  For some reason (my poor communications skill no doubt) some readers of the blog took the message that I want companies to have cash on their balance sheet to ensure debt repayment.  That, absoloutely was not the point of this piece.  The blog aims to present the following framework to assess if the cash on a company’s balance sheet is real:  

1) Estimate the amount of debt a company can conservatively support from operating earnings after writeoff of useless assets and assets carried at higher than sensible valuation (GE Capital has a plethora of such assets) and after incorporating unfunded liabilities.

2) If the current debt of a company is lower than what was estimated in step 1, the cash of the company is real. If the amount is higher, subrtract the excess from the cash shown.

When you do these steps, you will find cash balance of companies other than tech giants is not real. But that does not mean that such cash is uselesss. Heavily indebted Ford lived through the 2008 crisis because it encashed all borrowing limits well before the crisis and had cash to see it through. GM and Chrysler did not. But such cash, which can help you in times of crisis, cannot be used for M&A or Capex as being touted on the business papers and TV channels.

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