We all know what cash is. Accounting standards call it “cash and cash equivalents”. Loosely speaking, “cash equivalents” are placements in the money markets that can be converted to cash very quickly. The principal amount is usually secure due to the short-term nature of the placement, and a small interest income is earned. This is certainly better than leaving the excess idle cash inside a drawer. For our analysis, the accounting definition of “cash and cash equivalents” works perfectly well.
However, there is something else that we will take into consideration in our analysis, which will go against accounting standards. We will consider as cash the following items (and anything similar to these items):
a) Short-term investments or placements in financial instruments
b) Investments in financial instruments labeled as FVPL (Fair Value Through Profit or Loss)
c) Investments in financial instruments labeled as AFS (Available-For-Sale), whether classified as a Current Asset or a Non-Current Asset
d) Investments in financial instruments labeled as HTM (Held-To-Maturity)
Accounting standards treat these four items as “non-cash” and uses different labels. This is well and good for accounting purposes. However, for our analysis, we will consider these four items as part of cash. Why will we do that? Take a step back and think about it: Assume ABC Corp. has excess funds of Php100,000 and invests it in the stock market or bond market, which are both highly liquid markets. Any time ABC Corp. needs the Php100,000, it can simply instruct the broker to sell the investments and get the cash immediately. The final amount is likely to be different from Php100,000 due to the passage of time since the balance sheet reporting date, but that’s not a critical issue. So…isn’t this as good as cash? There are valid reasons why accounting standards create these labels and “buckets”…we don’t need to follow these labels for our analysis.
One more thing to keep in mind: although it’s good to have cash, it’s not always good to have too much cash because cash, by itself, is an unproductive non-operating asset that does not generate income. Even if the cash is invested in financial instruments, the income generated is non-operating in nature…i.e. the investment income is not part of the daily operations of the business.
