Another Reason to Love Cash

When credit is tight, cash is king. So if you're looking for companies in which to invest, it's good to see ample cash on the balance sheet -- especially right now.

Some will argue that too much cash can be a problem, if it's not being used effectively. Many decried Microsoft's (NASDAQ:MSFT) enormous cash pile years ago, urging it to pay shareholders a dividend. It did, and now offers a 2.1% yield. Others are fine seeing lots of debt on a balance sheet, provided the company is getting more from the money it borrowed than it cost to borrow it.

Here's another reason to favor cash, though: Today's environment is going to make credit harder to come by, and can therefore leave companies less nimble and less able to take advantage of opportunities.

John Wachowicz, a finance professor at the University of Tennessee, alerted me to this, pointing out how he got his own wake-up call when reading about Goodyear Tire (NYSE:GT). Goodyear wasn't able to get cash out of its investment in a corporate money market fund because the fund had made investments in now-bankrupt Lehman Brothers. Goodyear ended up having to tap its revolving credit line with its bank.

As Wachowicz notes, it's likely that this scenario will happen all over the place, straining the lending capacity of banks, whose customers don't normally tap their corporate credit lines to this extent. According to a Bloomberg article, Duke Energy (NYSE:DUK) has tapped a $1 billion revolving credit line, while Ford (NYSE:F) has an $11.5 billion credit line. In fact, there's more than $1.4 trillion in untapped loan commitments as of a year ago, according to another Bloomberg article -- and that's a record. Be aware that the banks that survive this recent crisis will face the challenge of meeting their prior commitments to corporate customers.

For us investors, this is why cash-rich, low-debt companies may have the upper hand right now. Or at least you may sleep better at night, knowing you have some in your portfolio. Here are some with healthy cash balances and low debt-to-equity ratios:

Data: MSNMoney.com.

There's more to know about debt and cash, of course. Let The Motley Fool's own Philip Durell teach you a few tricks.