The first thing listed under the asset column on the balance sheet is something called current assets. This is where companies list everything that can be converted into cash in a short period of time (i.e., usually a year or less). Because these assets are easily turned into cash, they are sometimes referred to as liquid. They normally consist of cash and cash equivalents and short-term investments. Let’s look at each in more detail.
Cash and Cash Equivalents. Cash and cash equivalents are the amount of money the company has in bank accounts, savings bonds, certificates of deposit, and money market funds. These assets are money that is available to the business immediately. How much should a company keep on the balance sheet? Generally speaking, the more cash on hand, the better. Not only does a decent cash hoard give management the ability to pay dividends and repurchase shares, but it can provide extra comfort when times get bad.
There are some cases where cash on the balance sheet isn’t necessarily a good thing. If a company is not able to generate enough profits internally, it may turn to a bank and borrow money. The money sitting on the balance sheet as cash may actually be borrowed money. To find out, you are going to have to look at the amount of debt a company has. The moral: You probably won’t be able to tell if a company is weak based on cash alone; the amount of debt is far more important.
Short-Term Investments. Investments that the company plans to sell shortly or can be sold to provide cash are short-term investments. They aren’t as readily available as money in a checking account, but they provide added cushion if some immediate need were to arise. Short-term investments become important when a company has so much cash sitting around that it has no qualms about tying some of it up in slightly longer- term investment vehicles (such as bonds, which have maturities of less than one year). This strategy allows the business to earn a slightly higher interest rate than if it stuck the cash in a corporate savings account.