Excess cash and its relationship with the value of the company

Excess cash and its relationship with the value of the company

Abstract:

Excess cash in companies is a widely debated topic in the financial field due to its implications for value creation or destruction. This article comprehensively explores the key aspects related to excess cash. First, the concept is introduced along with its importance in financial management. Then, the calculation method is described, followed by a financial analysis to assess its advantages and disadvantages.
Using the trade-off model, the limits and potential impacts of maintaining cash surpluses
are examined. Additionally, excess cash is interpreted as a real option, highlighting its strategic role in financing future investments with a positive NPV.

The conclusion establishes that maintaining a moderate level of excess cash can be beneficial in environments where access to financing is limited or costly, as it serves as a
strategic reserve. However, exceeding certain levels may reduce the company’s value due
to the opportunity cost of not investing that capital in operational projects. In contexts of
abundant and inexpensive financing, excess cash becomes less relevant, ultimately having
a negative impact on the organization’s value.

Keywords: Cash, Exceed cash, Trade-Off Theory, Enterprise Value