What it is:
Cash equivalents are company assets that are easily converted to cash.
How it works (Example):
Although there is some leeway for judgment in particular situations, examples of equivalents include marketable securities and Treasury bills. To be considered a " equivalent," a security must be so near maturity that there is little risk of change in its value if interest rates change (this typically translates to less than three months of remaining maturity). The Financial Standards Board requires companies to establish policies concerning which types of short-term, highly liquid investments are treated as equivalents.
Why it Matters:
The amount of sales are low or expenses are particularly high. However, companies with a lot of or equivalents are often takeover targets because their excess essentially helps buyers finance their purchase.and equivalents a company holds has implications for the company's overall operating strategy. For instance, companies with high amounts of or equivalents are better able to get through hard times when
Highreserves could also indicate that management has not figured out how to best deploy the or equivalents, but for capital-intensive companies, high reserves could signal that the company is "saving up" to make some significant purchases.
It is important to note there is an opportunity cost to holding and equivalents; that cost is the return on equity that company could have earned by investing the in a new product or expanding business.