If companies are willing to go to the time and trouble to commit fraud about their revenues, profits and cash and do it well enough to fool their auditors too, then why not just make up a number for interest earned as well?? Why post interest numbers earned so low that it attracts red flags? That really doesn't make sense to me.
So then how could these companies earn such low rates of interest then? Many of these companies are actively doing acquisitions or at least want to have the money available if the opportunity comes along. Until recently, demand deposits paid .36% in China, so that explains rates that low. However if some of the cash raised in the USA remains in US banks, the demand deposit rate here is much lower, around .05%. Then if some of the money is parked in Hong Kong banks, the interest rate earned there is also much lower as well. Why keep funds in Hong Kong? If the company is a manufacturer and buys materials internationally, it makes it easier to pay for them rather than going through the extra hassle of getting china currency out of the country. If they sell internationally, maybe AR is often paid in Hong Kong or other currency. Don't forget that the companies discussed here are small and management is focused on running their operations. They don't have the time to chase the higher yields, rather focusing on safety and liquidity. Don't forget what happened to Bears Stearn and Shearson when they decided to chase higher yields.
I'm not saying that low yields on cash should be ignored either, but there are valid reasons that companies may be earning less on cash than others are. To assume that low cash yields must be a fraud is a mistake. It is just too easy for a fraud to fix that simple indicator.
Thanks Rato, very helpful.
Looks like rates are creeping up. I agree, interest rates below 0,36 (now 0,40) are basically impossible
AI
