Restricted Cash: What It Is, Importance, Example

What Is Restricted Cash?

By Anders Bylund – Updated Nov 21, 2024 at 10:32 AM

Key Points

Restricted cash is cash set aside by a company for specific future expenses.
Understanding restricted cash helps analyze company liquidity and financial strategies.
Check footnotes in financial reports for details on restricted cash usage.

Investing in stocks involves more than just analyzing a company's revenues and profits. Sometimes, you find yourself swimming in a sea of not-so-familiar financial jargon. One such term that might pop up every now and then is "restricted cash." What is it, and why should you care? Let's have a look.

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A stack of hundred dollar bills in a chain and padlock. — Image source: Getty Images.

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Not every company breaks out restricted cash as a specific line item in financial filings. It's fair to say that pretty much every business of publicly traded scale carries some cash in restricted accounts, but some lump these balances in with the basic total of cash and cash equivalents instead.

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First, don't mistake it for a debt-like item. Although it's set aside for specific uses, it's not a liability. It is simply cash with a specific purpose and isn't available for general-purpose spending. When analyzing a company, compare the restricted cash to other assets and liabilities to get an overall picture of its financial state.

Second, always read the accompanying footnotes or disclosures that explain the purpose of the restricted cash. Companies report this under U.S. generally accepted accounting principles (U.S. GAAP), and the explanations can provide insights into management's priorities and planning.

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About the Author

Anders Bylund is a contributing Motley Fool media and technology analyst covering semiconductors, cloud computing, internet infrastructure, quantum computing, and streaming media. Previously, Anders was a systems administrator for Nielsen Technology and CSX, gaining hands-on experience with enterprise-class systems. He was also a freelance writer for Ars Technica, TIME, USA Today, CNN, WIRED, and AOL's Daily Finance. He holds a bachelor’s degree in English and a master’s degree in library and information sciences from Florida State University. He believes in coyotes and time as an abstract.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zoom Video Communications. The Motley Fool has a disclosure policy.