In his view, hoarding cash short-changes minority shareholders by resulting in a constant loss of income. This practice will also lower a company’s return on equity (ROE) and, over time, drag down its share price.
When assessing a company’s fundamentals, a balance sheet flushed with cash is usually a good thing, particularly when it comes to meeting short-term or unforeseen obligations or liabilities. Naturally, a company that is net cash is preferred over a company with net debt.
But how much cash is too much? UOB Kay Hian’s John Cheong told The Edge Singapore last November that companies with cash equivalent to more than five years’ worth of earnings should either pay out special dividends, conduct share buybacks, or raise their payout ratio to above 100%.
