Wasting versus Nonwasting
CashInourview,thedebateabouthowmuchcashisneeded
foroperationsandhowmuchisexcesscashmissesthepoint
whenitcomestovaluation.Notethatevencashneededfor
operationscanbeinvestedinnear-cashinvestmentssuchas
Treasurybillsorcommercialpaper.Theseinvestmentsmay
makea lowrate ofreturnbut theydomakea fairrate of
return.Putanotherway,aninvestmentinTreasurybillsisa
zero netpresent value investment,earning exactly what it
needstoearn,andthushasnoeffectonvalue.Aswenotedin
Chapter 3,we should notconsider thatcash to be part of
working capital when computing cash flows.
Thecategorizationthataffectsvalueisthereforetheonethat
breaksthecashbalancedownintowasting andnonwasting
cash.Onlycashthatisinvestedatbelow-marketrates,given
theriskoftheinvestment,shouldbeconsideredwastingcash.
Thus,cashleftinacheckingaccount,earningnointerest,is
wastingcash. Giventheinvestmentopportunitiesthatfirms
(and individual investors) have today, itwould require an
incompetentcorporatetreasurerforabigchunkofthecash
balancetobewastingcash.Asanillustration,almostallof
Microsoft’sverylargecashbalanceisinvestedincommercial
paperorTreasurybills,andthesamecanbe saidformost
companies.
Asananalyst,howwouldyoumakethiscategorization?One
simplewayistoexamineinterestincomeearnedbyafirmas
apercentoftheaveragecashbalanceduringthecourseofthe
yearandcomparethisbookinterestrateoncashtoamarket
interest rate during theperiod. If the cash is productively
invested,thetworatesshouldconverge.Ifitisbeingwasted,