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Ask a Fool: Why Is It Bad for Companies to Have Tons of Cash?

By Matthew Frankel, CFP® – Apr 26, 2019 at 12:00PM

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Why do investors complain about the massive cash stockpiles of some companies?

Q: I've heard investors complain about Apple's massive stockpile of cash, and I've even heard Warren Buffett lament Berkshire Hathaway (BRK.B -1.07%) having too much cash. How could having over $100 billion in the bank be a bad thing? 

Having a massive amount of cash is a good problem to have. Cash gives companies financial flexibility, especially during tough times. Cash-rich companies rarely go bankrupt, no matter what the economy throws at them.  

Still, having an excessive amount of cash is a problem. Take Berkshire Hathaway's case. At the end of 2018, Berkshire had $112 billion in cash and equivalents on its balance sheet, and since it hasn't made any major acquisitions since the year ended, it's likely to be even higher now. 

This $112 billion, or roughly one-fifth of Berkshire's entire market cap, that is sitting around in bank accounts or short-term Treasury securities is earning little or no returns. If Berkshire can earn a 10% return on its invested capital and its cash is earning 2%, for example, this means that the company is missing out on 8% of $112 billion, or about $9 billion, in earnings per year.  

Investors would love to see Berkshire use its cash to acquire another company, invest in more stocks, or buy back large quantities of stock -- any of these would likely produce a better return than what the cash stockpile is generating now. 

To be clear, some cash is desirable. Warren Buffett insists on keeping at least $20 billion of Berkshire's assets in cash so the company will always be able to meet its financial obligations. However, having too much cash is using a substantial portion of a business's investable capital in an entirely unproductive way. 

Matthew Frankel, CFP owns shares of AAPL and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends AAPL and Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.

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