If a company has excess cash, it can be invested easily in the financial markets to earn a variety of passive non-operating income (i.e. interest income, cash dividends, capital appreciation, etc.). These are usually highly liquid investments in the stock or bond markets and can be liquidated at any time. Depending on the purpose of the investment, accounting standards label these investments as either FVPL (Fair Value Through Profit or Loss), AFS (Available-For-Sale), or HTM (Held-To-Maturity). HTM is applicable to investments in debt securities only.
There is no need to go into a lengthy discussion here about the nuances of these labels because there are lots of sources out there that do just that. The important thing to keep in mind is that regardless of the labels used (in compliance with accounting standards), at the end of the day these investments can be sold easily in the financial markets and converted to cash immediately (we assume here that these investments are in liquid securities in a liquid market, which is often the case).
Thus, for our analysis, we will treat all investments in financial instruments as part of cash.
