Cash On The Balance Sheet: Not Always As Good As It Seems

Case Study: Pharmaceuticals

The top nine pharmaceutical companies in the US hold about $115 billion in cash. Problem is, many of these companies hold up to 75% of their cash internationally. Large deductions would be needed when evaluating Pfizer's (NYSE:PFE) $26 billion cash hoard and J&J's (NYSE:JNJ) $13 billion as well. J&J actually had to issue debt last year to make dividend payments because so much of their cash is held abroad.

Problem #3: The Cash Never Really Existed

The most obvious problem is when the firm lists cash that doesn't truly exist. This is much harder to spot that the others because obviously it's not disclosed, but a prudent investor should take the time to analyze a potential investment's balance sheet. With both Madoff and Enron, most people who spotted problems didn't know exactly what was wrong but they knew something just didn't add up. The saying holds true that if anything ever seems too good to be true, it probably is.

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