S&P 500 Cash Hoards Playing Havoc With Valuation Measures
- Credit Suisse study finds excess cash lifts equity multiples
- Return on invested capital diminishes with idling cash
This article is for subscribers only.
Having extra money around is nice in a pinch. But it also doesn’t earn anything, and that can make it hard to value companies when they build up big piles of cash.
Analysts with Credit Suisse Group AG estimate that one measure of financial health for U.S. large caps, return on invested capital, would be about 4 percentage points higher right now if not for the $1.5 trillion of cash stashed on their balance sheets. The problem is simple: if you raise $1 million and only spend $500,000 on factories, your return is still judged against the original million.