Introduction
“Cash is King” is a term utilized in many occasions to refer to cash flows in business entities. Moreover, the term has gained popularity in analysis of investment or business portfolios. Most investors use this term to refer to times of short-term debts as well as times of large cash flows. When investors talk of holding cash, then it is always assumed that they are not investing. In fact, holding cash is considered unpopular among investors. This is mainly because they feel that the money should always continue to rise. However, one thing that is never considered is the fact that during events such as recession, holding cash is advantageous. The assumption, that holding cash is a form of idleness is quite misguided, this is mainly because cash form an investor’s most prized asset. This rarely happen unless there is a cash crunch throughout a region, as was witnessed during economic recession. This paper will explore the evidence for this comment as well as analyze its viability (Fool, 2009, p. 1).
Cash is King
“Cash is king” is a term used to promote holding of cash in business entities, especially for use in times of recession. Several reasons have pegged the practice of holding cash among investors and business entities. Among these, include the fact that they cannot justify such actions. Lately, these notions have taken a new turn after the recently witnessed economic recession. Excessive leverage has fueled economic turmoil with lending that is below acceptable standards. When investors hold cash, they are usually protected from several snags. These include selling a cheap asset to buy another cheaper one.
In addition, it bars investors from benefiting from fascinating investments, for instance special occasions that may arise. A good example of a stock that suffered heavily from inadequate cash is the Bear Steams. This was a solid investment with all indications pointing towards its improvement. Then all of a sudden, it was in a mess. It was quite surprising to hear that a once solid business was down to its knees because of cash flow. Eventually Morgan Chase came to its rescue with a bailout. Interestingly, a once solid business was sold-off at over 90% loss. It is therefore important to note that cash opens gates for further investments. This can be proved as in the case of Pfizer, which grabbed Wyeth, in the process, opening door for Merck to pick up Schering-Plough (Fool, 2009, p. 1).
Discussion
“Cash is King” is therefore a true expression in itself. Companies that have solid cash flows can afford buyouts at any moment. In fact, these companies have the ability to cope during crunch times in stock market. For instance, when fear grip the market, only companies with cash flows can survive. One assumption that misleads people is the thought that solid liquidity and stock value can help companies to secure large sums of monies for acquisitions. It is quite important to note that this applies only during merry times when the market is either stable or expanding. However, if the opposite is happening, valuation of stocks is greatly affected, and this has the ability to cause a close down of the company. In essence, Cash is King and companies should ensure there is continued cash flow, to ready them for any eventualities (Tilson, 2000, p. 1).
Conclusion
“Cash is king” is a term used to refer to and promote holding of cash in business entities, especially for use in times of recession. Several reasons have blocked the practice of holding cash among investors and business entities. It is quite important to note that this applies only during cheerful times, when the market is either stable or expanding. However, if the opposite occurs, valuation of stocks is greatly affected, and this has the ability to cause a close down on the company. In essence, Cash is King and companies should ensure there is continued cash flow, to ready them for any eventualities (McInerney, 2005, p. 1).
Reference List
Fool, S. M. (2009). Cash Is King Again. Fool.com. Web.
McInerney, J. (2005). Cash is king in a recession! AME Info FZ LLC. Web.
Tilson, W. (2000). Cash Is King. Fool.com. Web.