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Are liabilities always a bad thing?

Liabilities are obligations and are usually defined as a claim on assets. However, liabilities and
stockholders' equity are also the sources of assets. Generally, liabilities are considered to have
a lower cost than stockholders' equity. On the other hand, too many liabilities result in
additional risk.

Some liabilities have low interest rates and some have no interest associated with them. For
example, some of a company's accounts payable may allow payment in 30 days. With those
payables it is better to have the liability and to keep your cash in the bank until they become
due.

In our personal lives, our first house was probably purchased with a down payment and
mortgage loan. That mortgage loan was a big liability, but it allowed us to upgrade our living
space. I viewed my mortgage loan liability as a good thing because it allowed me to own a nice
home in a beautiful neighborhood.

So some liabilities are good—especially the ones that have a very low interest rate. Too many
liabilities could cause financial hardships.

Companies aren't banks that they have to keep a certain percentage of their cash in liquid assets.

Companies can do whatever they want with their extra cash as long as the board agrees.

The point is if the money is invested in non-liquid assets then you cannot say that the company
has so much in reserves. Although investment in non-liquid assets increases the book value per
share of the stock, loose cash in a CBLO account is different. Actually the shareholders might
ask for its pound of the flesh if a company keeps too much reserves. If a company has plans
for inorganic growth it may say that it wants to earmark it for such and such activity.

As far a company laws are concerned there is no compliance to comply with.


Higher stock may mean lesser sales or redundancy if goods produced

Higher receivables mean higher risk of bad debts

Even very high cash means lost opportunity by not utilizing it for better productive purposes

If your trade receivables are high (relative to something and also consider debtors days), it
means you are not collecting money owed to you effectively. Your credit policies are weak
and you are losing money through bad debts.

If cash is high, then you are not adequately investing your money. Companies with large cash
reserves often become targets for aquisitions due to their favorable liquidity. Often you will
see companies try to utilize their excess cash as soon as possible through mergers and
aquisitions or investments in other worthwhile projects.