Cash and Cash Equivalents (CCE)
What it is:
Cash and cash equivalents (CCE) are company assets in cash form or in a form that can be easily converted to cash.
How it works (Example):
Although there is some leeway for judgment, common examples of cash and cash equivalents include bank accounts, money market funds, marketable securities, and Treasury bills. To be considered a "cash 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).
Why it Matters:
The amount of cash and cash equivalents a company holds is very important and is a large component of a company's overall operating strategy. For instance, companies with high amounts of cash and cash equivalents are better able to get through hard times when sales are low or expenses are particularly high. High cash reserves can also signal that the company is "saving up" to make some significant acquisition.
However, companies with a lot of cash on hand are often takeover targets because their excess cash essentially helps buyers finance their purchase. High cash reserves can also indicate that management has not figured out how to best deploy the cash.
It is important to note that there is an opportunity cost to holding cash; that cost is the return on equity that company could have earned by investing the cash in a new product or expanding business.
Many theories exist about how much cash certain kinds of companies should hold. The current ratio and the quick ratio help investors and analysts compare company cash levels in relation to certain expenses.