It is an open secret that US companies have gathered huge cash amounts over the last two years. 76 billion provided it more cash than the united states treasury a few weeks ago, and I did so a post on some time on whether Apple experienced too much cash return. While this “sitting on cash story” can be an interesting one, there’s a sub-story that we need to focus on which may affect how we value companies.
Not all of cash balances are equally benign. In fact, a significant portion of the money balance, at some companies, may be “trapped” and thus not easily accessible, either for investments or paying dividends. What is trapped cash? Trapped cash identifies the portion of a company’s cash that is held a company that is kept in fully-owned international subsidiaries or systems of the business. Note that there is nothing unlawful or unusual about this phenomenon even.
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All multinationals create revenue, cash flow and cash moves in foreign markets, and the ones cash flows are held (at least briefly) in those marketplaces. As US companies generate larger proportions of their earnings overseas, the money flows they generate from international markets has increased also. Exactly why is it trapped? Operating reasons: Towards the extent that there are significant development opportunities in foreign markets (especially in Asia), the money is being kept in abeyance to pay investment needs in these markets. Foreign restrictions: In a few markets, the country involved has put significant limitations on remittances from that nationwide country back again to the United States.
To be reasonable, these restrictions are sometimes tied to incentives or favorable tax treatment wanted to the company for buying the united states. US tax laws and regulations: Income produced by US companies in international countries is first taxed by those countries, when it is earned. However, it is not at the mercy of US fees until it is remitted back to the United States, with foreign taxes paid allowed as a credit. 1 billion in taxes in China, it’ll pay the Chinese corporate taxes rate of 25% with this income. 250 million in Chinese fees paid as an offset already.
100 million. By allowing the money accumulate in the international subsidiary, the company can postpone paying taxes to the US government. Thus, there is certainly both a cash flow and a reported earnings rationale for holding cash in foreign subsidiaries and the price of remittance will increase over time, as the foreign cash balance increases. How big is the trapped cash balance?
1.4 trillion in stuck cash. The truth is that nobody has a precise estimate because US companies aren’t required to expose how much of their cash is held in international subsidiaries. Public reports: While companies are not required to break out their stuck cash, some companies voluntarily do so.
76 billion in mid-2011 is committed to foreign devices). You could extrapolate from the true amounts reported by these companies to the rest of the market. Thus, if 55% of the money balances at companies that report foreign cash balances explicitly is trapped cash, you could assume that a similar proportion applies to companies that are not explicit.