**Excess cash** is the amount of cash **in excess of what the company needs to run its business**, in other words **cash that can be paid out to investors without harming the business.**

## Excess cash calculation

It is calculated as follows:

If Total Current Assets are **greater than** (2 x Total Current Liabilities), then **Excess Cash is the lower of**:

- Cash and Short Term Investments OR
- Total Current Assets - (2 * Total Current Liabilities).

If Current Assets are **not greater than** (2 x Total Current Liabilities) then **Excess cash is zero**.

## Excess cash calculation example

Let us assume a company’s:

- Current Assets minus two times its Current Liabilities equals €1000
- And its Cash and Short Term investments equal €500.

It **has excess cash** because Current assets are larger than two times Current liabilities.

Excess cash is thus **€500, the lower of €1000 and €500.**

## Where does this formula come from?

Joel Greenblatt on his Magic Formula Investing website said **only excess cash must be deducted when calculating the Enterprise Value of a company.**

This makes sense as you will agree that** a business cannot pay out all the cash on its balance sheet** but only the amount **more than it needs to run its business.**

Unfortunately Joel does not mention how he calculates excess cash.

## We went back to Benjamin Graham

We used one of **Benjamin Graham’s margin of safety rules** he wrote about in his book The Intelligent Investor which says:

*“ Invest only in companies where the current ratio (Current assets / Current Liabilities) is more than 1.5.”*

We **increased this ratio to two before assuming a company has excess cash**.

So as you can see a **very conservative calculation.**

### How you can use the ratio

Excess cash is **used to calculate the Enterprise Value of a company** and is not available as a screening value.

Available as a screening ratio: **No** (Excess cash is used in the calculation of **Enterprise Value**)

Available as an output column ratio: **No** (Excess cash is used in the calculation of **Enterprise Value**)

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