# What is excess cash?

Many non-financial companies have on their balance sheet short-term assets in the form of cash and cash equivalents. This cash can be used to cover short-term loans, pay dividends, buyback shares, settle with suppliers, pay taxes, etc.

Companies may also have short-term income-generating investments. As a rule, these are highly liquid securities that can be sold and converted into cash during a trading session. Cash, their equivalents and short-term investments can be grouped into the Total Cash group.

Excess cash is the amount of cash beyond what the company needs to perform its daily operations. Excess cash is generated when total current non-cash assets fully cover total current liabilities.

## Calculation formulas

All initial data for calculation are in the balance sheet of annual or quarterly financial reports of non-financial companies.

The formula for calculating excess cash is as follows:

$\mathrm{Excess Cash}=\mathrm{Total Cash}-\mathrm{MAX}\left(\mathrm{Total Current Liabilities}-\mathrm{Total Current Non-cash Assets},0\right)$

The formula for calculating total cash is as follows:

$\mathrm{Total Cash}=\mathrm{Cash & Cash Equivalents}+\mathrm{Short-term Investments}$

The formula for calculating total current non-cash assets is as follows:

$\mathrm{Total Current Non-cash Assets}=\mathrm{Total Current Assets}-\mathrm{Total Cash}$

## Calculation examples

Let’s calculate the excess cash for 3 companies: Boeing Co, Apple Inc and Nike Inc. The data are taken from the annual financial statements for the fiscal year 2018. The unit is $1 million: Boeing CoApple IncNike Inc Cash and Cash Equivalents$7,637$25,913$4,249
Short-term Investments$927$40,388$996 Total Current Assets$87,830$131,339$15,134
Total Current Liabilities$81,590$116,866$6,040 Total Cash$8,564$66,301$5,245
Total Current Non-cash Assets$79,266$65,038$9,889 Excess Cash$6,240$14,473$5,245

Please note that Nike Inc has all the total cash in excess, because the total current non-cash assets fully cover the total current liabilities.

• Act as an airbag. Cash may be needed by the company to cover current liabilities, interest payments or other unforeseen expenses. Excess cash allows to survive during the difficult economic times;
• May indicate competitive advantage. The fact that there is excess cash means that the company is capable of making money beyond need. If the excess is large, the company probably has a consumer monopoly. For such a company should look more closely;
• May be spent on dividend payments or further growth. The board of directors may pay out excess cash in the form of dividends or spend it on the expansion of production. Thus, excess cash will serve to increase the intrinsic value of the company;
• Act as a discount when buying a company. For example, you buy a company with excess cash of $300 million and debts of$50 million. You pay $1 billion for the transaction. In fact, you paid$750 million because you got access to excess cash, compensating part of the amount spent by $250 million after paying off debts for$50 million.