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Companies are still holding decent amounts of cash on their balance sheets, despite a broader tightening in financial conditions.
Morgan Stanley’s accounting team takes a closer look at that cash in a note today. For companies in the large-cap Russell 1000, cash makes up a smaller share of enterprise value than it did before 2020:
The sources and uses of this cash provide some more insight into the ways companies are spending (and not spending). Income is in line with 3Q22, more or less, and companies appear to be spending a less of it on all types of things:
Taking a longer-term perspective, there hasn’t been much of a reduction in spending, but it has flatlined a bit:
Morgan Stanley also looks at the Russell 1000’s cash conversion cycle, or the time it takes for inventory to become cash. The cycle is currently 85 days for Russell 1000 companies; 11 days more than last year, and half a day less than last quarter:
Their stores of working capital have increased a bit after falling last year; both of those changes make sense after the Covid-19 dash for cash led companies to hoard unprecedented amounts of liquidity:
To be sure, the analysts present most of these metrics as tools for picking specific stocks, and finding which companies have been hurt most by tighter financial conditions. There’s some use to this, as they recommend screening for companies with strong balance sheets and cash flow (and provide some examples).
But at the macro scale, the most important indicator for companies is the changes in their debt burden and interest costs relative to cash flow. The note doesn’t dive too far into that. But the analysts do highlight a notable annual increase in utilities’ total debt outstanding (perhaps reflecting an US utilities’ creditors expectation that regulators will approve rate increases after years of inflation):
And it’ll be worth watching how corporate cash evolves, especially as short-term rate cuts look like less of a sure thing.
