SINGAPORE (July 3): Cash is one of the more important metrics for investors to examine before investing in companies. The level of cash usually relates to the investment safety of companies, where the higher the amount of cash, the safer the investment. This is mainly because having more cash allows the company to do a variety of different things such as expanding its business and paying dividends. But most importantly it acts as an insurance and financial cushion during rainy days.

The level of cash a company has can be found in the balance sheet or the statement of financial position. Cash is the most liquid form of asset a company can own because other assets in comparison take time to convert into an acceptable medium of exchange. For example, if a company owns property, it may take a considerable amount of time to find a buyer for the property and for the cash to be settled, or even to be able to sell it at a favourable price. Because of this, cash is the most reliable form of asset, assuming all other assets are fairly valued or not overvalued. The key point to note here is that the more liquid the asset is, the more reliable and safer the investment into the company is.

However, it is important for investors to look at cash in relative terms, not absolute terms. A company, for example, may have a few hundred million dollars in cash but a few billion dollars in debt. This company is much worse off than a company which may only have a few hundred thousand dollars in cash but no debt from an investment safety perspective. At the same time, the first company is unlikely to be able to pay dividends and would have to borrow money to pay dividends, which further exacerbates its weak financial position. The second company in this situation would have less of a need to borrow money in order to expand its business and has much more flexibility in deciding how it chooses to finance its expansion.

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