Companies Shrink Cash Buffers as Economic Shock of Pandemic Fades

Median cash ratios—a liquidity metric that compares cash and equivalents to current liabilities—have declined steadily in recent quarters but remain above prepandemic levels, according to S&P Global Market Intelligence, a financial data provider. Highly rated U.S. companies had a median cash ratio of 21.5 during the first quarter, down from 29.1 a year earlier, but still above the fourth quarter of 2019, before the pandemic began, when their ratio was 19.5, according to S&P.

Speculative-grade rated companies had a cash ratio of 34.1, down from 47.1 a year earlier but still higher than levels at the end of 2019, when the ratio stood at 28.9. Companies with a low credit rating typically carry larger cash buffers and have a smaller pool of investors interested in their debt. In total, S&P’s data set included more than 10,700 investment-grade and non-investment-grade companies.

The decline in cash ratios shows that companies, after storing excess cash to weather the pandemic, are putting that money to work. Still, trends vary by industry. Below is an overview of liquidity buffers in different industries.

Many companies in the industrial sector have seen their cash ratios decline below prepandemic levels. The median cash ratio for investment-grade industrial companies was 21.4 during the first quarter, down from 37.8 a year earlier and 23.8 during the fourth quarter of 2019.

Companies in the sector are grappling with the effects of the supply-chain backlog and ongoing production delays, said

Chris Dankert,

senior vice president at investment firm Loop Capital Markets. Many companies are using cash to buy additional inventory as they face longer lead times on their orders, he added. “Right now it’s all about working capital management on the industrial side of things,” he said.

Healthcare companies—including those in subsectors such as pharmaceuticals, insurance and biotechnology—have also pared down their cash buffers to 2019 levels. Investment-grade rated companies in the sector had a median cash ratio of 38.3 during the first quarter, compared with 43.9 a year earlier and 40.7 during the fourth quarter of 2019.

Demand in the healthcare sector is generally inelastic, meaning it is largely steady barring an extreme economic shock, said

Damien Conover,

a director of healthcare equity research with financial firm

Morningstar Inc.

That means there is less need for companies to carry significant cash reserves, he said. Companies in the sector over the past year have put their capital to work through acquisitions and, to a lesser extent, share buybacks, Mr. Conover said.

Cash ratios at companies across a range of other industries—consumer discretionary goods, information technology and energy, among others—continue to decline but remain above 2019 levels, according to S&P.

IT companies, which typically carry large cash balances, largely performed well during the pandemic when many companies shifted to remote work, resulting in elevated cash ratios. Meanwhile, ratios in other industries such as consumer staples have varied over the past two years, but still remain high.

Still, among the largest U.S. companies, total cash balances remain higher than they were before the pandemic. Cash, equivalents and short-term investments at S&P 500 companies totaled $8.3 trillion at the end of the first quarter, up 1% from a year earlier and 42% from the fourth quarter of 2019, according to S&P.

Write to Kristin Broughton at [email protected]