“All the same, textbook guidelines should not be ignored. High levels of cash on the balance sheet can frequently signal danger ahead. If cash is more or less a permanent feature of the company's balance sheet , investors need to ask why the money is not being put to use. Cash could be there because management has run out of investment opportunities or is too short sighted and doesn't know what to do with the cash.
Sitting on cash can be an expensive luxury because it has an opportunity cost, which amounts to the difference between the interest earned on holding cash and price paid for having the cash as measured by the company's cost of capital. If a company, say, can get 20% return on equity investing in a new project or by expanding the business, it is a costly mistake to keep the cash in the bank. If the project's return is less than the company's cost of capital, the cash should be returned to shareholders.
Don't be fooled by the popular explanation that extra cash gives managers more flexibility and speed to make acquisitions when they see fit. Companies that hold excess cash carry agency costs whereby they are tempted to pursue "empire building". Top managers can fritter away cash on wasteful acquisitions and bad projects in a bid to boost their personal power and prestige. With this mind, be wary of balance sheet items like "strategic reserves" and "restructuring reserves". They are often just excuses for hoarding cash.
Even worse, a cash-rich company runs the risk of being careless. The company may fall prey to sloppy habits, including inadequate control of spending and an unwillingness continually to prune growing expenses. Large cash holdings also remove some of managers' pressure to perform.
There is much to be said for companies that raise investment funds in the capital markets . Capital markets bring greater discipline and transparency to investment decisions and so reduce agency costs. Cash piles let companies skirt the open process and avoid the scrutiny that goes with it.”
Their cash has been put to good use obviously. They likely wouldn’t be turning a net profit every quarter if it wasn’t. Additionally, within the last year they have implemented a new core strategy, signed new clients/expanded and doubled their quarterly revenues. This all in the short time since Norman Tipton became our CEO. Much, much more to come. Oh yeah and that’s all with the share structure remaining unchanged. O/S = 52 million & float = 24 million. No dilution and no debt. Long & strong. $TREP
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