Cash Position

What is a 'Cash Position'

A cash position represents the amount of cash that a company, investment fund or bank has on its books at a specific point in time. The cash position is a sign of financial strength and liquidity. In addition to cash itself, this position often takes into consideration highly liquid assets, such as certificates of deposit, short-term government debt and other cash equivalents.

BREAKING DOWN 'Cash Position'

A cash position refers specifically to an organization's level of cash in relation to its expenses and liabilities. Internal stakeholders look at cash position as frequently as daily, while external investors and analysts look at an organization's cash position on its quarterly cash flow statement. A stable cash position is one that allows a company or other entity to cover its current liabilities with a combination of cash and liquid assets.

However, when a company has a large cash position above and beyond its current liabilities, it is a powerful signal of financial strength. This is due to the fact that cash is needed to fund growing operations and pay off obligations. However, too large of a cash position can often signal waste, as the funds are generating very little return.

Other organizations, such as commercial and investment banks, are generally required to have a minimum cash position, which is based upon the amount of funds it holds. This ensures that the bank has the ability to pay out its account holders if they demand funding. When an investment fund has a large cash position, it is often a sign that it sees few attractive investments in the market and is comfortable sitting on the sidelines.

Cash Position and Liquidity Ratios

An organization's cash position is usually analyzed through liquidity ratios. For example, the current ratio is derived as a company's current assets divided by its current liabilities. This measures the ability for an organization to cover its short-term obligations. If the ratio is greater than one, it means that the company has adequate cash on hand to continue to operate.

A cash position can also be found by looking at a company's free cash flow (FCF). This FCF can be found by taking a company's operating cash flow and subtracting its short-term and long-term capital expenditures.

Example of Cash Position

Outside analysts often look at a company's FCF to gauge its performance. For example, Chase Corp., as of July 14, 2016, has an FCF that is 40% higher than its net income, which represents an FCF yield of 7.2%. This means that its available FCF is $34 million per year, which is expected to be used to cover its credit line obligation with Bank of America.

Trading Center