Cash and Cash Equivalents important, included, company, point, still

Maddin

Hi Guys,

We tend to combine Cash and Short Term investments as Cash. However, Long term investments are less liquid and are not included in Cash Equivalents.

However, what do you do when you are calculating the Enterprise Value , Market Cap + Debt - Cash. Do we still not include the LT invesments in Cash at that point ? I don't think at that point the liquidity is a prime issue. What is important when calculating the EV is how much "total" cash a company has regardless of its lliquidity status. Is that a correct assumption.

Thanks.

jcfa2011

anything that can be turned into cash in 3 days is considered cash. So if you can turn LT investments into cash in 3 days then yes, include

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CFA Jay, CFA



Edited 1 time(s). Last edit at Monday, July 25, 2011 at 04:03PM by CFA Jay.

brain_wash_your

So , in effect , all investments ( current and non-current ) are considered cash equivalents ?

soverby

Exchange traded instruments (often called "marketable securities") can be considered a cash equivalent.

Illiquid investments aren't cash equivalents (for obvious reasons: cash, being legal tender, is the most liquid asset). Your investment in your home or business is not a cash equivalent, because there is no way to plausibly assert that it can be turned to cash in a few days.


There is an implicit assumption with cash equivalents that they are not highly volatile: i.e. that their value in a week is going to be pretty much their value today (which is why it's an "equivalent"), plus perhaps a bit of interest. I'm not sure if the accounting rules actually stipulate that in the definition of cash equivalents and what the cutoff for volatility would be, and I doubt that it is a CFA exam type question. However, in doing your own analysis, if you discover that a company is claiming that some highly volatile stock is a "cash equivalent," then you either want to separate that out in your analysis, or discount that portion of cash to reflect the risk that the stock will be worth substantially less than today's value whenever it is needed as cash.



Edited 1 time(s). Last edit at Monday, July 25, 2011 at 04:25PM by bchadwick.

ap0258

Good advice from bchadwick

noel

> I'm not sure if the accounting rules actually stipulate that in the definition of cash equivalents and what the cutoff for volatility would be

My GAAP book indicates that LT Investments are those intended to be held for > 1 year. No mention of or requirement for (il)liquidity. These investments can include those that are highly marketable (debt and equity securities, surrender values of life insurance policies, etc.) and less marketable (land).

bcp901

DarienHacker Wrote:
-------------------------------------------------------
> > I'm not sure if the accounting rules actually
> stipulate that in the definition of cash
> equivalents and what the cutoff for volatility
> would be
>
> My GAAP book indicates that LT Investments are
> those intended to be held for > 1 year. No
> mention of or requirement for (il)liquidity.

+1

That's correct. I've analyzed companies that have accounted for the majority of their investments as LT, but most were very liquid (over 80% could be liquidated within a week).



Edited 1 time(s). Last edit at Thursday, July 28, 2011 at 11:38AM by JensensalphaMale.