What is Trading Below Cash?
How Does Trading Below Cash Work?
Trading below cash can be illustrated by a company which holds $1m in cash reserves, has $500k in outstanding liabilities, and has a total market capitalization equal to $400k. Its cash reserves less its liabilities are equal to $500k ($1m - $500k = $500k), while the total value of its stock is only $400k.
Why Does Trading Below Cash Matter?
A company with stock trades below cash is, generally, financially healthy, but not using its capital resources in an effective manner. In other words, cash holdings do not add value in the same way as the extrinsic value of the investments it may be used to purchase.