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Net cash

A way of expressing how much an investment company is exposed to cash after offsetting cash balances first against its gearing.  It is expressed as a percentage of shareholders’ funds.

A way of expressing how much an investment company is exposed to cash after offsetting cash balances first against its gearing.  It is expressed as a percentage of shareholders’ funds.

Investment companies may not always be fully invested in the markets they specialise in.  They may hold cash, or cash equivalents, which have a very small chance of losing money.  The more cash they hold, the less risky the investment company is.  However, if markets rise, holding cash may also reduce the returns the company makes.

Sometimes investment companies hold cash as a means to reduce gearing.  Holding cash can be a cheaper way of reducing gearing than, say, repaying a bank loan, which might incur penalties for early repayment.  It can also be easier to increase gearing later if the markets look favourable, as the company can invest the cash and does not need to take out new gearing facilities.

When an investment company with cash balances also has gearing in place, any cash is first offset against the company’s gearing to give a lower gearing figure.  So, if an investment company has 10% gearing, and 5% in cash, we would show this company as being 5% geared.   On the other hand, if the company’s cash balances rose to 15%, then we would show gearing as 0%, and net cash as 5%

See also gearing.

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