THE MYTH OF CORPORATE HOARDING
Are South African companies hoarding cash? A research study commissioned by Business Leadership South Africa set out to answer this specific question, and it has come to the conclusion that this is not the case. This finding is drawn from a study of 85 mining and industrial companies among the top 100 companies on the JSE over the last 10 years.
Amongst the key findings, the report shows that South African companies have been investing throughout the period. Roughly three quarters of capital expenditure is on new investments and expansion of existing production lines, with the balance spent on maintaining existing infrastructure. Capital expenditure has been particularly strong in certain years, particularly 2012 and 2015.
Total cash held by non-financial companies has grown by 17.4% a year, with much of the growth coming through in the past five years. In the latest year, the sample group held R765bn worth of cash, up from R154bn 10 years ago. While this appears to be a significant growth in cash balances it can mostly be explained by the following factors:
- After adjusting for inflation, cash holdings grew by 11% a year.
- Multinationals form a significant portion of the sample group, many of which have little activity in South Africa, including the single largest cash holding company, BHP Billiton. Much of the cash held by these companies is in hard currency. Over the period, the rand depreciated from R7.29/$ in 2007 to R16/$ during 2016. This means that every $100 of hard currency holding would have increased from R729 to R1,600 over the period, an annual growth rate of 8.18%.
- Company balance sheets as a whole have grown dramatically during the period, in part due to inflation and rand depreciation. When examined as a percentage of total assets, cash levels have fluctuated from 6.4% to 10.2%, and were at 7.8% at the end of the period. This indicates that almost all of the growth in cash holdings is a function of the growth of companies as a whole.
- A great deal of the cash held by companies is held to replace plant and equipment as it reaches the end of its useful life. Depreciation and amortisation of equipment was equivalent to 55% of cash holdings in the most recent year. The rate of growth in depreciation and amortisation has been slightly higher than the rate of growth of cash.
Companies are getting bigger but business confidence may wane
Another notable finding from the study is that most SA companies have grown significantly over the past decade. However, this growth may be offset by recent weak economic and political conditions in the country, which may lead to a trend of waning business confidence. When management is confident of the economic outlook for a country, they are likely to invest more in order to prepare for increased demand.
More notable findings
- It is common for companies with surplus cash who do not wish to invest it, to distribute their cash as dividends
- SA firms have become more indebted, with the ratio of debt to total assets increasing from 75% to 100%. Balance sheets have therefore become riskier overall, increasing the amount of cash held to reduce risk
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- Click here to download the study: The Myth of Corporate Cash Hoarding