Sep 062012

The unfolding public argument that was kicked off by Bank of Canada governor, Mark Carney, and abetted by federal Finance Minister, Jim Flaherty, over the past weeks, continues.  The Globe and Mail contributes the National Bank’s latest view of the corporate cash hoarding situation.

What’s especially rich about all of these indictments and apologies is–for an historian, like me, or anyone else inclined to believe that ALL statements are positioned–the nature of the spin that goes on.  In this article the National Bank’s chief economist dwells on, among other things, the cash position relative to market capitalisation.  This MAY be an interesting ratio and comparative among and between organizations.  It is NOT especially meaningful.  Why?

Consider those companies Mr. Marion (chief economist for National Bank) holds out as exemplars of disproporationately high cash to market cap:  the ratio is “bad” because of the denominator, not the numerator.  In fact, the numerator (cash on hand), is not even mentioned in its actual, real value.  One way to get this picture really clear in one’s head is to use Facebook over two weeks as an impression of whether the measure is meaningful as anything but a comparison tool among organizations.

At time zero, about a month ago or so, assuming that Facebook’s cash on hand was stable throughout this example and period, it would have had an extremely low cash to market capitalization ratio.  Undoubtedly enough for Mr. Marion to say they were holding insufficient cash.  But 2% of $900B is about … carry the one… is about $18B!!!  That’s a lot of Ben Franklins.  Fast forward only 2 weeks with no discernable change in the company except that its stock was sold off in the market.  Now that $18B is about 4.5% of $400B market capitalization and IT’S STILL A LOT OF BEN FRANKLINS!

I don’t know if the cash position of corporate Canada is undue (I suspect it is in many cases) or not.  But, if the cash position is not a warchest for some acquisition or investment, or is more than what’s needed to operate for say a year without revenue, it might be too much.

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