Companies shrink cash buffer as pandemic hits economic shock

According to financial data provider, S&P Global Market Intelligence, the median cash ratio—a liquidity metric that compares cash and equivalents to current liabilities—has declined steadily in recent quarters, but remained above pre-pandemic levels. Is. According to S&P, highly rated US companies had an average cash ratio of 21.5 during the first quarter, up from 29.1 a year ago, but up from the fourth quarter of 2019 before the pandemic began, when their ratio stood at 19.5.

Speculative-grade rated companies had a cash ratio of 34.1, up from 47.1 a year ago, but higher than the level at the end of 2019, when the ratio was 28.9. Companies with low credit ratings usually have large cash buffers and a small pool of investors interested in their debt. In total, the S&P’s data set included more than 10,700 investment-grade and non-investment-grade companies.

The fall in the cash ratio shows that companies are putting that money to work after accumulating extra cash during the pandemic season. Still, trends vary by industry. Below is an overview of liquidity buffers across various industries.

Many companies in the industrial sector have seen their cash ratios fall below pandemic levels. The average cash ratio for investment-grade industrial companies was 21.4 during the first quarter, up from 37.8 a year ago and 23.8 during the fourth quarter of 2019.

Chris Dankert, senior vice president at investment firm Loop Capital Markets, said companies in the sector are grappling with the effects of supply-chain backlogs and ongoing production delays. He said many companies are using cash to buy additional inventory as they face more time on their orders. “Right now it’s all about working capital management on the industrial side of things,” he said.

Healthcare companies – including sub-sectors such as pharmaceuticals, insurance and biotechnology – have also reduced their cash buffers to 2019 levels. Investment-grade rated companies in the sector had an average cash ratio of 38.3 during the first quarter, compared to 43.9 a year ago and 40.7 during the fourth quarter of 2019.

Demand in the healthcare sector is generally volatile, said Damien Conover, director of healthcare equity research with the financial firm, which means it is largely stable except for extreme economic shocks.

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This means companies have less need to keep significant cash reserves, he said. Over the past year companies in the sector have put their capital to work through acquisitions and, to a lesser extent, share buybacks, Mr. Conover said.

According to S&P, the cash ratio in companies in several other industries—consumer discretionary goods, information technology and energy—continues to decline, but remains above 2019 levels.

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

Still, among the largest US companies, total cash balances are higher than they were before the pandemic. According to S&P, cash, equivalent and short-term investments in S&P 500 companies totaled $8.3 trillion at the end of the first quarter, up 1% from a year ago and up 42% from the fourth quarter of 2019.

write to Kristin Broughton et kristin.broughton@wsj.com