Accounting Gimmicks Have Boosted The Collective S&P 500 Cash Balance By Over $150 Billion Since The Start Of The Crisis

Tyler Durden's picture

Much has been said lately about the record cash balance on the books of S&P 500 companies (ex. financials- those are a different story altogether). Bullish pundits claim that this money will be used for all sorts of M&A, stock buybacks, expansions, etc., to make the point that companies can't wait to go out spending, so we should all front run them and buy whatever public companies may one day be on the auction block. We decided to take the inverse approach - by looking at the balance sheet and the cash flow statement of the S&P 500 companies (again, ex fins), we have attempted to understand just what the source of all this excess cash is. Listening to any of the permabulls on CNBC, one could easily get the impression that all this newly record cash comes simply from excess revenue which, courtesy of massive layoffs and a collapsing SG&A line, feeds an ever increasing retained earnings line, which in turn goes straight to cash. While this is certainly possible, our analysis indicates that the primary source of cash over the past year has really been a very generous cash "rotating" adjustment in some critical CapEx and Net Working Capital items. Our findings demonstrate that of the nearly $130 billion in additional cash on the books of S&P 500 companies from June 2008, through September 2009, two key sources, net working capital and a reduced capex spend, have generated over $150 billion, meaning organic operations have accounted for a whopping -$20 billion (yes, negative) of incremental cash.

We have used CapitalIQ data to analyze quarterly periods beginning in December 31, 2005 through September 30, 2009 (the data for the most recent quarter has not been fully compiled yet, with about 100 companies having yet to file a 10-Q. Once all the required data has been deposited into Edgar, we will update this analysis for data including the Q4 2009 period).

First, we present the cash holdings for all companies, ex. fins, that make up the S&P 500. It should come as no surprise to anyone that companies have been hoarding cash: whether this is due to uncertainties about the future, or some other reason, is irrelevant. Again, our focus here is whether this cash was accumulated fair and square, or whether it was some simple accounting fudge of balance sheet/cash flow items.

So once we know that S&P500 balance sheets are replete with cash, the next question is not where it is going, but where did it come from. In other words, is this merely a transfer from one asset/liability to another?

We analyzed the Capital Expenditures and Depreciation and Amortization data of the universe under observation. What we noticed was a dramatic reduction in cash outflow patterns, coupled with a substantial increase in the depreciation and amortization, beginning with the Q1 2009 quarter, or just after the economy went to hell in H2 2008. As the chart below demonstrates, CapEx which has historically trended not only higher, but represented an average $26 billion differential to Depreciation and Amortization over the past 4 years, took a sudden and dramatic leg down beginning in Q1 2009. At precisely the same time companies, no doubt in order to get the benefit of a D&A tax shield, ramped up their asset depreciation activities. The net result: for the first time in many years, the differential between CapEx and D&A turned negative: companies were depreciating more than they were adding to their PP&E, in Q1, Q2 and Q3 (although in Q3 the number turned just slightly positive). This is the definition of asset stagnation, as normal asset-intensive businesses (remember, this exercise excludes financial companies), need to add to their PP&E by more than they traditionally depreciate due to the unequal GAAP amortization schedules. In other words, in the first three quarters of 2009, the S&P 500 asset base depreciated by much more than it was repleted, thus substantially impairing its cash-generative powers. This can be seen on the chart below.

It is no wonder then that companies managed to "generate" substantial cash - instead of investing in their asset base, they simply let PP&E (unadjusted for various GAAP gimmicks) decline, while building the cash and cash equivalents portion of the balance sheet.

What will be the impact of this going forward as the PP&E has to be renormalized? In the LTM period CapEx - D&A was negative $42 billion, while the average LTM differential over the past 4 years has been positive $13 billion. This means that companies will have to spend an incremental $55 billion over time just to catch up to the PP&E trendline, let alone to add incremental cash generating assets. And since the immediate IRR for organic capex is traditionally much higher than for external acquisitions (with some notable exceptions), it is only after this catch-up has been accomplished, that the S&P500 companies will be truly seeking M&A opportunities, as opposed to what the mainstream media will have you believe. The topic of how much less in taxes S&P 500 companies paid in 2009 due to the tax shield nature of the incremental D&A boost is a topic for another day.

In addition to cash retention through asset deterioration, another favorite trick of company CFOs is to boost cash at the expense of Net Working Capital (ex. cash), i.e. the difference between current assets (Accounts Receivable and Inventory) and current liabilities (Accounts Payable). Therefore, the next analysis we did was to analyze the Net Working Capital status of S&P 500 members. The results were as expected: from a peak of $520 billion in June of 2008, NWC (ex. cash) has declined to the current almost three year low of $430 billion. In other words, as companies have accelerated their cash collections via declining AR balances, they have also pursued inventory liquidations, coupled with flat or expanding Accounts Payables. The chart below shows this accounting gimmick in vivid color:

Following the cash generated by this decline in NWC, leads to the following chart: as pointed out above, roughly $90 billion has been generated simply as a function of squeezing cash out of other current net working capital, and simply rotating this into the cash & cash equivalents balance sheet item.

So what does combining all this data conclude? As was pointed out initially, the non-financial S&P500 companies boosted their cash holdings by roughly $130 billion from June 30, 2008 through September 30, 2009. This would have been great if this was cash attained in the traditional way, whereby sales get converted into retained earnings, and cash, all else equal. However, a dig through several hundred balance sheets and cash flow statements, indicates that of this $130 billion cash increase, about $90 billion was due to Net Working Capital Changes, and another $55 billion was due simply to underfunding capex by an amount required to preserve maintenance cash generation from existing asset bases. Which means that of the cash boost, operations generated a whopping...($15) billion in cash! Had companies not been using accounting gimmicks to boost cash on a one time basis, current cash would likely have been about $15 billion lower than June 30, 2008, or $688 billion. The adjusted cash balance, normalizing for Net Working Capital shifts and normalizing CapEx spending since June 30, 2008 is shown below:

The conclusion is that one should be very wary of generalizations such as those by JP Morgan which claim that companies, sitting on huge cash war chests, are now ready to go out and spend, spend, spend. The truth is that had companies not been using various accounting fudge factors, their real cash position would have been much more precarious. Should companies revert to their mean Net Working Capital and CapEx exposure over the past 4 years, we will see $155 billion of cash disappear merely to plug the hole that was dug over the past 3 quarters merely to make S&P 500 balance sheets more palatable.

We will update this analysis with Q4 data as soon as it is available in its entirety.

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Zippyin Annapolis's picture

If you want a real tour of the impact of corporate fantasyland accounting on aggregated corporate liquidity throw in the financials which are I believe 17% of the market. Woops our "cash" for investment is really fairy dust accounting entry. Not good.

Missing_Link's picture

You say "fairy dust" like it's a bad thing.

Careless Whisper's picture

he prolly meant to say angel dust accounting.

Get_to_the_choppa's picture

Nah, everyone knows banksters love white girl...and I don't mean caucasian females...

jdrose1985's picture

Hmm. Astounding work TD..

And I had just been taking the cash surplus story for granted until now...

After reading all the headlines regarding looming M+A activity and cash rich businesses, I feel violated once again.


Dirtt's picture

I didn't believe it but not because I had any clue of how to begin to prove it.  It just falls under the same category as the 'hockey stick' which means it didn't pass my smell test.

Scientific eh.  The smell had been stuck in DefCon1 since the summer of 2006.  The smell of chicken chit and Sunday morning Frat house puke is in the DefCon 2-3 category.

Anonymous's picture

If we assume the facts in your article are correct the corresponding impact will soon show in Tax collections by the Governemnt. While the Governement screems about corporate tax loop holes they fail to talk about the Government loop holes that are reverse tax shelters or cash reduction machines that suck cash out of companies.

While depreciation may take a 7 year period for a company the rate of depreciation for tax purposes will usually be somewhere in the area of 30 years. The net result of this is that the governemnt collects more cash faster than the depreciable life of the asset.

If companies are reducing cap x its only a matter of time until the cash collection game collapses for the Government

Zippyin Annapolis's picture

Book and tax numbers are always different--the government wants to tax the difference --but only if it is in their favor!

RobotTrader's picture

All that matters is whether or not institutions are buying or selling.

Yesterday, they were buying J.C. Penney on a record volume breakout over the 50-day off a lengthy consolidation:

I have no idea what JCP's P/E ratio is, how much cash they have, or what their cash flow is.  Probably just some hungry institutions who are selling bonds and need a place to park it.

In this case, they chose JCP because of its "4 days to cover" short position, and the bears have been piling on this thing for months.

Good enough excuse to incite a short squeeze, eh???

Anonymous's picture

big deal, JCP has been selling off since October and got a pop off from earnings

Dirtt's picture

A company peddling rubber donuts is staring down a 35%+ sh. int. Why live a boring life when real life train wrecks in super slow mo are abound?

john_connor's picture

Nice work, TD.

The accounting gimmeckry is a part of the assorted bs and fraud that must be rooted out before we have a recovery.

deadhead's picture


It just kills me that American business has gone from a model where one's word and handshake, as well as one's committment to truth and full disclosure, were the order of the day and those characteristics were highly valued.  Not only were they valued, but if you broke away from that model your name was mud and you were phucked. 

We have come close to completely reversing course and the results of this are eminently clear.  As John says above, the bullshit and fraud must stop.

Our country's business (and political) leaders are for the most part a sorry bunch of bullshit artists and con men.  Our current descent into the abyss of failed civilizations is in large part due to the loss and disregard of the fundamental value of telling the truth to others as well as oneself.

putbuyer's picture

To further. I have always wondered how we have survived as a population, as so - so many manufacturing jobs left for the orient in the last 2 decades+.

I wonder if there is too many people on earth to sustain?

My cabin is almost ready to use. 14 x 24 and just a wood stove.

Live free of die...

ZeroPower's picture

I get it. Cabin with canned beans, some blocks of gold, and ammo.

You do realize you wont be able to browse ZH inside?

TheGoodDoctor's picture

He'll have his iphone. Besides I thought that ZH is getting an iphone app right?

Dirtt's picture

Words of wisdom from war torn places around the world...toilet paper.

Anonymous's picture

Are your initials NK ???
Seriously though, enjoy the cabin life.
My best sleep is in my cabin in the Blue Ridge...
Its the only place I can get away from the financial train
wreck we find ourselves in
If you don't have a copy of "Alone in the wilderness"
get one.

Yes We Can. But Lets Not.'s picture

Luv to see a pic of your cabin.

Doug's picture

Oh what a tangled web we weave, when first we practice to deceive.

Sir Walter Scott Jr.

velobabe's picture

head, i don't know dick about this topic. does it have anything to do with an investor that has a lot of money? or are you guys talking about the cause and effect this will have on BIG publicly traded companies and that is reason for debate? or can this trickle into the system and effect the little guy financially?

you need to smile.

Get_to_the_choppa's picture

It's that last part that's really crucial...these guys have started to believe the lies they tell themselves.

Anonymous's picture

Agreed DH. Business ethics had become an even greater oxymoron (emphasis on MORON) than military intelligence. The problem, in all its complexity, revolves around the accounting gimmickry now allowed, sanctioned and even encouraged (by Govt.) under "GAAP Standards." Now a joke.

Not only can companies massively distort balance sheets to the positive through cash "rotating" adjustment in CapEx and Net Working Capital items; but equally pernicious are last year's suspension of mark to market for the financial co's. Then add, the now massively employed, what used to REALLY be "one time adjustments" for D&A or capital costs, and we have 10-Q's that have been twisted beyond all reliability or without full access forensic accounting.

Short of subjecting CFO's to polygraphs and electro-convulsive shock therapy (now we are talking!), I have very little faith in the "true and accurate" reportings of the assets and liabilities of co's. Cooking the books has become so endemic and epidemic that honest companies are drowned out by the liars and the fine print one-offs.

Unless, in disgust or total flight to safety of cash, one is totally out of the equities and fixed income markets, we sadly have all been co-opted to a more or lesser extent by the fictional 10'-Q's to even "invest" in the markets.

Anonymous's picture


I am also extremely worried about lack of integrity, truth, and transparency in how businesses are running nowadays. This for me is enough to avoid investing in stocks as it is very hard to make sure you are not being fooled by creative accountants. I will wait patiently until a new companies based on trust and full investment disclosure appear and happily invest in them (even in the current terrible environment).


Anonymous's picture

On a similar note. In the WSJ's analysis of Tiger's "confession" or just plain press conference there was a one piece of incisive analysis. To paraphrase: it was that in the end, Tiger would be OK because in the US the only morality that we truly cling to is that of success. Sad but true.

Anonymous's picture

It is not accounting gimmickry, aside from accelerated depreciation - which always has been. Working capital liquidation and the liquidation of PP&E do not flow through earnings. It is a balance sheet "transition", but what is reported is in fact the truth.

I look at 10 companies or more per week and have for the last few years. Beginning in the first quarter of 2009, it seems that what ZH describes is absolutely true. Most of the companies I look at are likely well below maintenance capex. It makes the calculation of FCF problematic, or worse completely inaccurate. Plus, as described, working capital liquidation has provided an inordinate gain in cf from operations.

Ultimately it is likely a shift that needs to occur, as sales once the economy "recovers" will be substantially lower than the prior peak. With access to, and desire for, credit plus a behavioral shift in US society, there is substantial overcapacity.

Slight deflation is the future, not inflation. Now possibly 10 years from now inflation could be horrible, but it simply will not be in the coming 5 years, regardless of excess reserves, etc.

Anonymous's picture

No hyperinflation nor currency crisis in history has occurred on the basis of demand-pull inflation.

Anonymous's picture

Wait a second...

I thought holding the US dollar was *bad*?

In which case, companies not having cash is actually a good thing, right?

I'm so confused....

Anonymous's picture

Bit confused: generating cash by withholding capex or liquidating stocks is not an accounting gimmick. You could do it even if you had no bookkeeping.

Assetman's picture

Apparently I don't get it either, anon.

Withholding cap ex and lowering working capital is a business decision, usually signaling that a company is going into cash conservation mode.  That has been the modus operandi for many companies since 2008.  I just don't see that as accounting gimmicktry, the way I see acceleraing revenue recognition, or deferring a declining asset value as gimmickty.

Interestingly enough, the cap ex and working capital trends do illustrate a very imporant point-- those companies still aren't confident that end demand will be able to sustain itself into the future.  Otherwise, they would acquire, invest, and/or expand their working capital balances.

I'd be a lot more concerned that a company was building cash by issuing equity, raising debt, or selling valuable equipment.   Of course, many companies have expanded their working capital and cap-ex spending on the basis of greater confidence-- only to see demand not appear.  That's would what you would call a bad business decision.

Hephasteus's picture

That's why they have green shoots spell. To try to get people to do that and get themselves in trouble so they can come in and buy up. It's like saying it's all safe and good, go for a jog and 2 miles into your jog you get attacked by zombies and you're exhausted.

theadr's picture

Businesses are "waiting" for the "lowest price" until they start CAPEX.  Better not wait too long:  Elimination of weaker firms will lead to monopoly pricing power.

Anonymous's picture

Yes, this is not accounting, but it is a good example for general deleveraging. Growing demand for immediate cash, and aversion against lending or investing at a risk for future returns. Thats credit contraction, and thats why deflationists may be right.

Anonymous's picture

yours is the only comment worth anything. I swear, some of the people that comment on these boards are under 10 years old.

Anonymous's picture

withholding cap ex is deferring a declining asset value which is as you say "gimmickry"

Assetman's picture

Cute.  But no.

You can't have a declining asset value if you don't own the thing that depreciates.  You are making a business decision on whether to own the equipment or not.

Though inflationists would have a problem with the extra cash on hand in the first place.

Anonymous's picture

Agreed. At my company much of our past 2 decades of cap-ex was highly over-rated (i.e. wasted) and now we've cut it back by 75% and are doing more with less. At our current capacity we could easily double our production levels (second shift, temps, equipment tweeks), which we knew all along anyway. The IT guys "technology spend" has finally been shut down (as this was the source of so many wasted dollars). Risk aversion outweighs new project spending in our company... i.e. we are perpetuating deflation.

Astute Investor's picture

Excellent read!  The obsession with FCF, FCF yield is often misguided.  Strong cash flow is certainly a good thing.  However, it depends which levers are pushed and pulled to generate cash flow and whether it is driven by skimping on investments.  Cut capex to the bone (funding only maintenance capex), shorten DSO for A/R and inventories while stretching your payables...and VOILA!!  Enormous FCF.  Unfortunately, this strategy can't last forever.  You can't generate strong top-line growth going forward if capex funding is less than depreciation and W/C is cut back.

Anonymous's picture

Let's not forget, Your Payables are someone else's Receivables, so on a net-net basis it is a gain (in cash) to one company and a reduction (in cash) to another. Therefor no gain whatsoever.

Anonymous's picture

Yes but a large chunk of those payables are owed by the Wal Marts of the world to their suppliers in China. Yet another way we are reliance on funding from our Chinese overlords to keep the debt financed consumer boom going.

BS Inc.'s picture

This means that companies will have to spend an incremental $55 billion over time just to catch up to the PP&E trendline, let alone to add incremental cash generating assets. And since the immediate IRR for organic capex is traditionally much higher than for external acquisitions (with some notable exceptions), it is only after this catch-up has been accomplished, that the S&P500 companies will be truly seeking M&A opportunities, as opposed to what the mainstream media will have you believe.

But, why would the mainstream media say something if it wasn't true?

Very nice analysis.

Anonymous's picture

That is great information to know, but I wouldn't call it trickery. Whether you grow your cash balance from cutting expenses or from revenue it is still cash. Doubtful they will go out and spend it until revenue picks back up though.

doolittlegeorge's picture

actually of course what matters is where the cash comes from.  if you don't have that you don't have the cash "claims" in the first place.  insofar as JC Penney is concerned of course they own Eckerd's drug store chain which needless to say "generate cash."  combine with a pretty much worthless retailer that you run like an 19th century sweat shop and you have a VERY good use for all that "phantom cash."  of course this piece is ridiculous because equities themselves represent "phantom cash" which so long as the Fed decides the dollar itself "is a phantom" makes this supposedly "unreal money" of equities very real indeed.  in other words "the song remains the same":  this is and always has been a story about debt and the debt markets.  in short:  screw the banks and everything will be fine, just be careful that you "screw them" in the right way.  how can anyone possibly argue that the government is failing in its approach?  so far only a few dead IRS agents.  drape a flag over 'em and call 'em heroes.