When tracking equity quality, which is used as one of the predictors of an incoming sell-off, cash holdings is a key component. This analysis uses three indicators that overall offer comfort when it comes to the current state of US corporate balance sheets. We observe elevated levels of net debt, but those are driven by a decline in cash balances, deployed as share buybacks to extract benefit from the 2017 tax reforms. In line with that, we see that CAPEX has been on a secular decline as a percentage of corporate cash since the mid-80s – cash has been largely returned to shareholders. Furthermore, the cycle isn’t over yet and the Fed is expected to withhold its dovish stance.
Why does this matter? Depleting cash balances of US corporates have raised some eyebrows among investors, but analysis shows that behaviour has been rather conservative and shareholder friendly. Investors shouldn’t be too worried for now. But it’s worth keeping an eye on balance sheets nevertheless – low cash does reduce the cushion if a blow is to happen.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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