Most of the time, when an investor or analyst searches through the financial statements of a publicly traded company, he or she will run across a reference to short-term liquid assets, or cash and cash equivalents. A lot of companies explain cash positions in a couple of sentences, if not a paragraph, that is similar to the following:

The following summarizes our cash and cash equivalents and marketable securities:

Cash and cash equivalents: $239
Marketable securities: $154
Total: $393

This example shows that a business using short-term marketable securities classifies them as a "cash equivalent". Marketable securities generally refer to an investment in commercial paper, banker's acceptances or Treasury bills. These securities are highly liquid, and generally provide the company a bit of a return on its investment - likely just enough to keep up with inflation. If all of the company's cash equivalent reserves are tied up in cash, it will lose a little bit of spending power every year to inflation.

Investment in equity is investment in stocks, or similar securities. While these are usually recognized as being highly liquid, they have a tendency to fluctuate in value - often dramatically. Stocks are not a great investment for a cash equivalent account. Although they can be readily converted to cash, there may be a significant spread between a stock's book value and its current price. A negative spread could result in a cash crunch. (See What's the difference between book and market value?)

The essential thing to note is that a marketable security will likely only be worth significantly less than what it was purchased for if there's a spike in interest rates. Equity investments, on the other hand, have a lot more potential to drop in value and are, therefore, not considered cash equivalent investments.

For more information, see Reading The Balance Sheet, Getting To Know The Money Market and Cash-22: Is It Bad To Have Too Much Of A Good Thing?

  1. Does working capital include inventory?

    A company's working capital includes inventory, and increases in inventory make working capital increase. Working capital ... Read Full Answer >>
  2. Does working capital include salaries?

    A company accrues unpaid salaries on its balance sheet as part of accounts payable, which is a current liability account, ... Read Full Answer >>
  3. Are mutual funds considered cash equivalents?

    Though all mutual funds are considered liquid assets, only certain funds are considered cash equivalents. What Is a Cash ... Read Full Answer >>
  4. Are dividends considered an asset?

    Whether dividends paid on stock are considered an asset depends on which role you play in the investment: the issuing company ... Read Full Answer >>
  5. What is a profit and loss (P&L) statement and why do companies publish them?

    A profit and loss (P&L) statement, or balance sheet, is essentially a snapshot of a company's financial activity for ... Read Full Answer >>
  6. How do dividends affect the balance sheet?

    Dividends paid in cash affect a company's balance sheet by decreasing the company's cash account on the asset side and decreasing ... Read Full Answer >>
Related Articles
  1. Economics

    Calculating Days Working Capital

    A company’s days working capital ratio shows how many days it takes to convert working capital into revenue.
  2. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  3. Investing

    What is EBITA?

    EBITA measures a company’s full profitability before reducing it by interest, taxes and amortization considerations, and so is useful for calculating a company’s internal efficiency or profitability ...
  4. Term

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  5. Investing

    How to Effectively Monitor Your Stock Holdings

    Investors should concentrate on the business, not the stock price.
  6. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  7. Economics

    Understanding Explicit Costs

    Common examples of explicit costs include wages, utilities, rent, raw materials, and other direct expenses companies pay to conduct business.
  8. Bonds & Fixed Income

    What are Treasury STRIPS?

    STRIPS is an acronym that stands for Separate Trading of Registered Interest and Principal Securities.
  9. Bonds & Fixed Income

    What's a 10-Year Treasury Note?

    A 10-year Treasury note is an intermediate debt obligation issued by the United States government, and with a ten-year maturity date.
  10. Mutual Funds & ETFs

    Top 3 China Bonds ETFs

    Explore detailed analysis of three exchange-traded funds (ETFs) that track the Chinese bond market, and learn about the suitability and characteristics of these ETFs.
  1. EBITA

    Earnings before interest, taxes and amortization. To calculate ...
  2. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and ...
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the ...
  4. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
  5. International Financial Reporting Standards - IFRS

    A set of international accounting standards stating how particular ...
  6. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!