Cash and cash equivalents (CCE) are the most liquid current assets found on a business’s balance sheet. Cash equivalents are short-term commitments “with temporarily idle cash and easily convertible into a known cash amount”. An investment normally counts to be a cash equivalent when it has a short maturity period of 90 days or even less(if maturity period is more than 90 days (e.g., 100 days), then it will not be considered as cash and cash equivalents) from date of acquisition and when it carries an insignificant risk of changes in value. Equity investments mostly are excluded from cash equivalents, unless they are essentially cash equivalents, for instance, if the preferred shares acquired within a short maturity period and with specified recovery date.
One of the company’s crucial health indicators is its ability to generate cash and cash equivalents. Company with a pp relatively higher net assets than cash and cash equivalents is mostly an indication of non-liquidity. For investors and companies cash and cash equivalents are generally counted to be “low risk and low return” investments and sometimes analysts can estimate company’s ability to pay its bills in a short period of time by comparing CCE and current liabilities. Nevertheless, this can happen only if there are receivables that can be converted into cash immediately.
However, companies with a big value of cash and cash equivalents are targets for takeovers (by other companies), since their excess cash helps buyers to finance their acquisition. High cash reserves can also indicate that the company is not effective at deploying its CCE resources, whereas for big companies it might be a sign of preparation for substantial purchases. The opportunity cost of saving up CCE is the return on equity that company could earn by investing in a new product or service or expansion of business.
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