Is High Tech Starting to Feel the Cash Crunch?

In recent earnings announcements, the eyes have been on revenues and profits. Who has managed to keep ahead despite economic conditions, and whose star seems to have been waning? But given those very conditions, it may be that there’s too much attention on earnings and not enough on cash, which is, after all, supposed to be king in bad times. But check a number of leading high tech companies and you’ll find that more often than not they’re already down on the money on hand from the same period last year.

The first thing you hear out of a management expert during general financial crisis is that cash is king. You want cash for a number of reasons, whether to bolster operations in the face of reduced earnings, make acquisitions, ward off fiscally poorer competition, or manage through tight credit. The surest measure of having cash is … actually having money on-hand and available for relatively quick use. And one way to see the company’s actual relationship to cash, without excuses of previous problems or expectations of future gain, is to compare the cash and cash equivalents on the balance sheet at the same time between two years and see whether the number has grown or shrunk. After all, experts suggest that we’re still early into this crisis, and if the number is already shrinking, you might think that it wasn’t a good sign.

By taking this approach, we’re at least comparing the most recent size of war chests that companies have. Before we get into the numbers, here are a few caveats:

• I’m including what companies define as cash and “cash equivalents” only. They may differ in how they define cash equivalents, but life isn’t always pretty and neither is accounting.
• I’m specifically ignoring securities — short-term or long-term, blue chip or Bernie Madoff. That’s in contrast to many views, including a piece in the Financial Times on cash at high tech companies. For example, it credited Microsoft as having nearly $21 billion in cash, but according to its most recent 10-Q, the company has $20.7 billion in “cash, cash equivalents, and short-term investments.” Over $12 billion of the number are investments, and that includes securities pleged as over $2.5 billino in collateral. You have to depend on a market to buy investments if you want access to the cash value, and as the financial institutions have found, markets can disappear with astonishing speed. And quickly dumping investments probably means fire sale prices — and a lot less value than your books show.
• The numbers are taken off balance sheets. By definition, these are snapshots at specific periods of time and the cash on-hand can change.
• I’m not taking cash flow into account. That is contrary to how many might view this, but given rapid changes in the economy, counting on future cash flow, or basing what will happen next year on the amount that came in last, seems unsound.
• Some of the numbers are translated from either South Korean won or from Euros and reflect the conversion factors on the day I converted the currencies.
• The last reported balance sheet runs anywhere from the end of September to the end of December.
• For many recently reported numbers, I had to use unaudited figures from companies. Final audited amounts can change significantly.

And now for the results (all amounts in billions):

Out of 17 companies, ten of them had cash and cash equivalent balanced that dropped between 2007 and 2008 — anywhere from eight percent (SAP) to over 54 percent (Intel). Winners, companies that grew their cash, ranged from just over nine percent (Oracle) to almost 43 percent (Google).

Clearly looking at changes in cash and cash equivalents is not even close to an exhaustive analysis of a company. For example, a drop in cash doesn’t mean unprofitable activities or even a net negative cash flow. HP undertook a large acquisition and Apple purchased more than double the “marketable securities” in 2008 that it did in 2007. No matter the reason, the outcome is the same: Either a company is building its cash position or there is less available.

Having cash on hand, of course, is no guarantee that poor results won’t drain the money quickly, leaving the company behind a competitor that started with less cash but was better managed. And in many businesses, cash can be cyclical, with one quarter tending to have a bigger cash balance than another. However, starting a bad period with more cash is still going to be better than starting with less. The question is where the companies will end up.

ATM image via Flickr user TheTruthAbout…, CC 2.0.