Excess Cash, an Invested Capital Adjustment

Firms use a portion of their cash and cash equivalents and investments as operating cash for the running of the business, and any cash beyond this amount is excess cash and a non-operating asset. As a rule of thumb, I assume that operating cash is equal to 5% of revenue, increasing or decreasing this requirement according to the firm’s operating profitability. Excess cash grants firms optionality, and protection against crisis, and, compounds as a consequence of a firm’s profitability. As a non-operating asset, excess cash is not part of my calculation of invested capital. In the last twelve months (2Q 2023 to 1Q 2024), Meta Platforms had $61.48 billion in excess cash, assuming that, given the company’s profitability, operating cash is 2% of revenue.

The Mirandolan

A labour of love from a quantitative investment analyst and economist, offering rigorous global equity research and essays on the economics of risk. This publication is reserved for matters of genuine import, published on an irregular schedule only when research warrants. Its readership comprises analysts, portfolio managers, and capital allocators from leading institutional investment firms across the world.

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