It’s time for big companies to stop playing Scrooge and spend their hoards of cash.
Accounting and financial services provider Deloitte says record unused cash reserves held by companies are leading to underperformance and destroying shareholder value.
Instead, companies should be using their spare cash to focus on growth, and mergers and acquisitions.
According to Deloitte’s report, The Australian Cash Paradox, just 32 of the non-financial services companies among the top 200 companies listed on the Australian share market are holding 82 per cent of total cash reserves, totalling $57 billion.
Those cash-rich companies had underperformed companies with small cash holdings by a factor of three since the global financial crisis, measured by revenue growth or share price performance.
“Not surprisingly, the global financial crisis had a profound impact on corporate cash hoarding tendencies, particularly among larger companies,” Deloitte mergers and divestments partner Robert Arvai said on Wednesday.
“Companies holding the majority of the cash war chest in corporate Australia are actually growth laggards. And lazy capital is delivering lazy growth.”
The cash reserves of the cash-rich companies in Australia jumped from $24 billion in 2008 to $46 billion in 2009.
The small cash-holding companies held reserves of $11 billion in 2008, and hold $13 billion now.
In the five years since the end of the global financial crisis, cash-rich companies had averaged capital expenditure at 74 per cent of cash reserves, well down from 131 per cent in the prior decade.
Small cash holding companies had maintained their capital expenditure at an average of 81 per cent of cash reserves over the same period, which was down less on the average of 95 per cent in the prior decade.
Financial markets were more rewarding of companies that had a more bullish approach to growth.
Since 2000, the share price performance of small cash holding
companies had grown by 632 per cent, compared to the large cash holding companies’ 327 per cent.
Deloitte said cash reserves were often used for merger and acquisition activity, but since the global financial crisis there had been a significant fall in this area as companies waited for market sentiment to improve.
But smaller cash holders had been consistently more aggressive in undertaking merger and acquisition activity.