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Cash conundrum

When the Great Recession struck, many companies decided to play defense—they stockpiled cash at levels not seen in decades.

And what about now, more than six years after the recession officially ended? To the surprise of many experts, cash still is king in much of corporate America. According to Standard & Poor’s Rating Services, the ratio of cash and short-term investments to total assets has continued to climb.

All told, U.S. companies are holding nearly $2 trillion in cash, Federal Reserve data show.

The trend is very evident in the top ranks of U.S. corporations. Alphabet Inc., parent of Google, in its most recent quarter reported nearly $69 billion in cash on its books, or just shy of 15 percent of its market value. The cash and short-term investments held by General Motors Co. are equal to nearly half of its market value.

Like Alphabet, Xerox Corp. has roughly 15 percent of its market capitalization in cash. At Eastman Kodak Co., another of Rochester’s top corporate employers, the figure is in the range of an eye-popping 140 percent.

Most analysts and economists view conservative cash strategies one of two ways. Some think playing it safe helped to prevent an even more severe recession and is warranted by the still-fragile recovery. They also believe this strategy leaves firms well-positioned to seize future opportunities.

Others, however, think companies sitting on piles of profit could do more for the economy if they invested in capital equipment and added employees. A growing number of national banks hold this view—and have responded by adopting negative interest rates. Harvard Business School finance professor Mihir Desai has suggested using a temporary tax on corporations’ “excess” cash to move them off the dime.

Both views have merit. The trick, then, is achieving the right balance.

Too much risk-taking endangers businesses and the economy as a whole. But now might be a very good time for a stronger show of confidence in growth prospects.

3/4/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.


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