Stuck on Yellow: The 2005 Cash Management Scorecard

Companies continue to be cautious with their cash.

Our second annual cash management scorecard suggests that Corporate America continues to let cash build on its balance sheets. The 1,000 large public companies tracked by REL Consultancy Group closed 2004 with more cash relative to their annual sales than they had in the prior year. That finding follows a similar one for 2003. On average, cash plus short-term investments rose to 11.4 percent of sales, up from 11 percent in 2003 and 9.7 percent in 2002.

According to most business economists, companies shouldn’t hold any more cash than they need to safely fund their operations, as equity investors bet that management will generate greater returns than those available on Treasury bills or other cash equivalents. The fact that cash is growing nonetheless means such returns are hard to come by, and that companies will face increasing pressure from those investors to return the money in the form of either higher dividends or share buy backs. Bond investors, on the other hand, may increasingly call on companies to pay down debt. REL calculates that if the average company in its 1,000-company universe had simply pared its cash levels to those in the lowest quartile of its industry sector by paying down debt, it could have boosted its return on capital employed to 15.2 percent from 14.0 percent.

That said, the overall increase in cash levels last year was moderate, and the rate of increase trended lower too. For the entire 1,000-company universe, the cash-to-sales ratio grew by only 4.1 percent from 2003 to 2004, after growing by 13.1 percent from 2002 to 2003 (see “Cash Is Still King,” at the end of this article).

Still, the findings reflect continued caution despite increased profitability and higher cash flows. In 2004, cash flow for the 1,000 REL companies grew to 2.4 times capital expenditures, up from 2.1 times in 2003 and 1.8 times in 2002. That suggests that managers have drawn one or more conclusions from the current environment: they foresee insufficient returns from new investment, are guarding against a downturn in business activity, or wish to build funds for future acquisitions.

Proving the Rule

Consider the booming oil industry, where profits and cash flows have been soaring along with crude-oil prices. Among the major oil companies, the average cash-to-sales ratio doubled to 7.0 percent from 3.3 percent during the past two years. For secondary oil companies, the ratio climbed to 4.9 percent from 2.6 percent; and for oil-equipment and -services companies, it jumped to 13.3 percent from 8.6 percent.

Even the exceptions to this industry trend seem to prove the rule. For example, Dallas-based Lone Star Technologies Inc., a $967 million oil-equipment and -services firm, saw its cash-to-sales ratio slide to 7.9 percent from 23 percent during the past two years. But its total cash declined only a bit, as the principal reason for the sharp downturn in its cash-to-sales ratio was a growing denominator. The company’s 2004 revenues were nearly double the $524 million it posted in 2004.

Elsewhere in the industry, 75 percent of the companies in the oil-drilling sector shrunk their cash-to-sales ratios over the past two years. The average company in the group saw its ratio fall to 11.3 percent from 22 percent. Houston-based Transocean Inc., a $2.6 billion oil-and-gas-exploration company, experienced one of the biggest declines, with its ratio falling to 17.7 percent from 45.4 percent. Yet that, too, was not an indication of a company throwing caution to the wind. Vice president and treasurer Todd Kulp explains that Transocean has been taking advantage of its strong cash flows over the past few years to dramatically reduce its debt, which now stands at about $1.6 billion after topping $5 billion as recently as 2001.


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