Surplus cash in a company – opportunity or challenge
Despite the unfavourable economic climate, many companies are currently facing the challenge of deciding how to manage their generated cash surpluses, writes Szymon Kołodziejczyk, manager at Thedy & Partners Finance, in Rzeczpospolita.
The stock market is in the midst of dividend season. Is sharing generated cash surpluses with investors the best idea? What should be done in a situation where excess cash cannot be paid out? It is said that “one’s head doesn’t hurt from too much”, but are you sure?
Let us examine the possible options for the allocation of these funds and the accompanying implications, particularly in the context of listed companies’ activities.
Distribution of profits
If the company does not have attractive investment opportunities and the degree of indebtedness is considered optimal, the surplus funds can be used to pay dividends or buy back shares.
It should be noted that the amount to be distributed to shareholders is limited by the provisions of the Companies Act, as a general rule, to the profits earned by the company concerned – either the current year’s profits or profits of previous years.
This should be considered in the context of the provisions of the dividend policy adopted by the company, as any possible deviation from the communicated declarations will be associated with a loss of confidence and outflow of investor capital.
In the case of dividend payments by Polish entities to foreign entities, withholding tax regulations also apply (if the limit of payments to a single entity of PLN 2 million is exceeded). However, it is possible to obtain an exemption or apply a preferential rate from double taxation treaties.
Distribution of profits may also occur through the decision to implement a programme of buy-backs of the company’s own shares, so-called buy-backs, for further redemption or distribution to executives under incentive schemes. Share buy-backs can also be seen as a form of investment when, in the perception of the company’s management, its current valuation is below fair value.
However, it is worth bearing in mind that disclosure of the buyback may be perceived by investors as an attempt to manipulate the stock market valuation. In addition, investors’ concerns may relate to the failure to realise key investments in the company and the future deterioration of its prospects.
There is more in the article on: investments, repayment of debt and leaving funds in the company.
The entire article can be read in Rzeczpospolita of 12 April 2023, pages: H1 and H3