US corporations' cash ratios fall toward pre-COVID-19 levels amid cost pressures

U.S. companies' cash ratios fell for a seventh quarter, and back toward pre-pandemic levels, as rising cost pressures spurred the drawdown of inflated reserves.

The median ratio at investment-grade companies declined to 21.5% at the end of March from 24.7% three months earlier, according to data compiled by S&P Global Ratings. At lower-rated companies, the ratio — calculated by dividing holdings of cash and equivalents by current liabilities — declined to 34.1% from 38%.

The high-grade ratio is now just 2 percentage points higher than the end of 2019 because inflation, spiraling wages and higher borrowing costs are starting to squeeze corporate finances. At the same time, companies are also returning cash holdings to more normal levels after building up enlarged buffers to help weather pandemic upheavals.

Non-investment-grade companies' median ratio is still 5.2 percentage points above the 28.9% reading seen in December 2019, giving them some breathing space amid the rising cost of borrowing. That is one reason why Ratings expects default rates to be relatively low even as the U.S. economy flirts with recession.

Still, the cash-ratio picture varies by sector. Real estate and communication services, for instance, have median ratios far above pre-COVID-19 levels. By contrast, the median has dropped versus 2019 for investment-grade health care, industrials and materials businesses, as well as for non-investment-grade energy companies and utilities.

In the highly cash generative information technology sector, which had the largest median ratios before the pandemic, the figure for investment-grade companies has dropped to 40.9% compared with 38.3% in 2019. The non-investment-grade measure remains elevated at 65.5% versus 55.2%.