this may sound stupid

but is cash an operating asset? It isn’t really generating any income? I’ve got one source online that says that it is…but I’d like to confirm…all the other websites don’t specify if cash is or not. Thanks!

Knee jerk. I think it is. Cash is used in general business operations.

It comes under current assets, so by implication, it is going to be used in the company’s business.

This is where my problem originated from: “Operating accruals are defined as growth in operating working capital less depreciation and amortization expense and, like other forms of investment, increase net operating assets. Firms with growth in working capital are likely to have growth in net operating assets. In contrast, cash flows from operations may or may not be reinvested in the firm. The firm might elect to use the cash to retire debt or to pay dividends, and thus operating cash flows may not be reflected in net operating assets at the end of the year.” I think I get it. So a company can use cash in paying off debt or dividends, which means obviously it won’t be part of net operating assets. If it doesn’t use it, then it is part of operating assets. Does that seem right?

Why wouldn’t cash be an operating asset, if it is there and available to be used in operations? Sure, it might not be generating a high return on its own, but that doesn’t mean it isn’t an asset that can be disposed of or converted to other assets. Once cash is spent, it’s either been converted into some other asset that goes on the balance sheet, or it has been disposed of (as in paying interest).

I’ve always been taught that cash can be either operating or non-operating. Typically, if you have no further information, cash is simply treated as an operating asset. However, if you are performing an in depth evaluation, you may take additional steps to arrive at a more precise determination of whether or not the cash is operating (essential to maintaining operations). There are two main methods: 1.) Industry level analysis: Determine industry cash / sales level and apply this to the company, any cash beyond that threshold (often roughly 2.5% for manufacturing firms) is classified as excess cash (a non-operating asset). 2.) Historical analysis: Determine historical cash / sales level for the firm and apply it to the company in the same manner as above. The idea here is that the company may have reasons to hord cash beyond that required for normal operations (upcoming debt payment, acquisition, required minimum balance to satisify loan covenants, etc.). In these cases, it gets treated as non-operational in valuation (subtracted at beginning of process, and added back to EV at the end).

Agree with Black Swan. If cash is materially above what is “required”, the excess cash would be non-operating.

beautiful. Thanks everyone.

I think additionally one would look at the purpose of examining operating assets. From a lenders perspective, you are going to lend LTD to a company based on some form of return on operating assets. Building, equipment, etc. If you are including the cash in the operating assets, this wouldnt add value to a lender to include how the company returns on an asset that is already cash. Cash is a medium of exchange and a unit of storage.