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What would you do with $70bn in cash?

Imagine what you would do with over $70 billion in cash. That’s the amount Australia’s largest companies currently have at their disposal.

Understandably, companies are cautious to spend in the aftermath of the global financial crisis. Clearly, holding onto more cash assists with risk control and acts as a buffer against economic volatility, while it can also be used to get debts under control.

The additional capital has also been put towards increasing shareholder payouts. In fact, the S&P/ASX 200’s (Index: ^AXJO) (ASX: XJO) current payout ratio is hovering at around 64% which is well above the 60% 10-year average.

In recent years, these statistics would have come as music to investors’ ears, as they threw their money at the market’s higher yielding stocks such as Telstra Corporation Ltd (ASX: TLS) or Commonwealth Bank of Australia (ASX: CBA) and its banking peers, namely Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).

However, what the payouts also highlight is that companies are still hesitant to invest in their own growth, preferring to instead play defensive by hoarding cash in reserve as well as returning excess capital to investors.

Of course, I’m not suggesting companies should spend unnecessarily – we saw how disastrous that was when companies like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) splurged on numerous acquisitions – many of which became victims of enormous write-downs or impairments.

On the other hand: “Saving for saving’s sake is pointless”, as pointed out by St George Bank senior economist Hans Kunnen. According to research conducted by CommSec, the cash held by Australia’s 30 largest companies (not including the banks) has risen by almost 25% over the last year to a total of $51.6 billion, while the cash held by the 98 companies to have reported in February has also risen an enormous 44.8% to $71.1 billion.

Foolish takeaway

The amount of cash held by a company should be a key factor behind any investment decision. The more cash on hand, the greater the company’s ability to repay debts or make strategic acquisitions. However, there is also a problem with having too much cash on hand as it is often not being used in the most profitable way.

While generous dividends are still attractive in any investment prospect, investors are now turning their attention towards companies that are actually willing to take the risk with some of their capital to boost long-term growth potential.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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