Cash Matters

Q Is it good to see a lot of cash on a company’s balance sheet? — N.R., Tacoma, Washington A Not necessarily. Having gobs of cash does allow a company to act quickly when opportunities arise, but if the money is sitting around for a long time, it’s not being put to productive use. Many successful companies keep their cash levels low on purpose. They use profits to pay dividends, buy back shares, pay off debts, hire more workers and lots of other things. If they suddenly need more cash, they can borrow it.

As an example, ExxonMobil rakes in more than $240 billion in revenue annually, but it recently had just $5 billion in cash (and cash equivalents — assets that can be readily turned into cash) on its balance sheet.

Amazon.com, meanwhile, recently had $143 billion in annual revenue and about $15 billion in cash and equivalents. Companies manage their cash in different ways.

*** Q How should I invest my money if I want it to grow as quickly as possible for a down payment on a house in a few years? — H.L., Hickory, North Carolina A The stock market is a great place to build long-term wealth, with stocks outperforming bonds and other alternatives over most long-term periods. But the stock market is volatile. Over the short term, it can go up or down, jeopardizing the down payment you’ve accumulated and plan to withdraw soon.

Don’t risk money you’ll need within five years (or even seven or 10, if you’re very risk-averse) in stocks. Short-term funds should be kept in a safer place, such as CDs or money market accounts, to protect your principal. You can find good short-term interest rates at bankrate.com. Want more information about stocks? Send us an email to foolnews@fool.com.