Is your company's cash pile a hidden liability?

It's not just the middle class. It seems like even Indian businesses are not spending money. As of September 2024, the non-financial companies in the BSE 500 index are sitting on cash and cash equivalents worth 11 per cent of their total assets.

But is holding on to excess cash actually a risk? Is this trend concentrated in a few sectors, or is it a broader shift? And most importantly—what does it mean for investors? Let's break it down.

Who holds how much

Some sectors naturally accumulate cash due to their business models. Take shipbuilding companies like Mazagon Dock and Cochin Shipyard. Their projects often span over the years, requiring deep cash reserves for ongoing construction, labour costs, and procurement.

Credit rating agencies such as CRISIL , ICRA , and CARE hold significant cash reserves because their asset-light business models require minimal capital expenditure. Similarly, IT giants like TCS , Wipro and Infosys generate high-margin revenue without heavy capital commitments. With minimal reinvestment needs, they naturally accumulate cash over time.

At the other end of the spectrum, capital-intensive sectors show a different story. Telecom operators like Jio and Airtel pour their resources into spectrum auctions and infrastructure. Steel makers like Tata Steel and JSW Steel need massive investments in blast furnaces and raw materials. Power companies like NTPC commit billions to long-term projects. For these industries, high cash reserves are a luxury they can rarely afford.

When cash works

When deployed wisely, cash becomes a powerful growth engine. Tata Consumer Products shows how it's done.

Through strategic acquisitions—from Tetley to Organic India—the company has maintained a conservative debt-to-equity ratio below 0.25 in the past 10 years. By generating free cash flow in eight out of 10 years while keeping cash at 7.7 per cent of total assets, they've proven that disciplined cash management can fuel sustainable expansion.

When cash weighs

But too much cash can become a burden. Just Dial , a B2B digital marketplace, illustrates this perfectly.

Between FY15 and FY24, Just Dial generated Rs 1,740 crore in operating cash flow. It spent only Rs 317 crore on growth initiatives and returned Rs 773 crore to shareholders through dividends and buybacks.

Additionally, it raised Rs 2,165 crore from Reliance in FY22, which remains largely unutilised. As a result, cash now accounts for 95.2 per cent of its total assets—a staggering number for a company that doesn't require substantial capital to grow.

Despite these reserves, Just Dial's revenue and net profit have grown at a sluggish 9 per cent and 4 per cent annually over the past 10 years. Its return on capital employed (ROCE) has nosedived from 27 per cent (FY19-21) to just 7.2 per cent (FY22-24).

It's not how much, but how well

For long-term investors, the question isn't just how much cash a company holds but how effectively it uses it. The key lies in identifying businesses that strike the right balance—leveraging cash reserves for strategic growth while ensuring consistent return of excess cash to shareholders.

Also read: ROE 98%, P/E just 1x: Is this small-cap a hidden gem or a value trap?