Marketable Securities and Short-Term Investments: Where Surplus Cash Sits

Marketable securities are holdings a business can sell readily in an established market, held with surplus cash rather than for control or for use in operations. Marketable securities sit close to cash without being cash. A cash equivalent must return a known amount; a marketable security need only be sellable. The difference between a known amount and a possible sale decides which line these holdings appear on and how much certainty a reader can attach to them.

Here is what sits underneath that. Every business that trades at all ends the day with money it has not yet spent. Some of it has a job next week and stays in the current account. Some of it has no job for several months, and leaving it in a current account is a decision as much as moving it is. The lines between cash, near cash and investment are drawn by two separate questions the accounts ask about the same holding: when is it expected to turn back into money, and what is it worth in the meantime. Held apart, those two questions make everything that follows fall into place.

Three things are already in hand. Cash and cash equivalents were settled earlier, including the two conditions a holding has to meet before it can sit inside that line. The three measurement routes were settled too, so amortised cost, fair value through other comprehensive income and fair value through profit or loss are already available as terms. And the evidence behind a fair value, ranked into three levels, was covered in its own right. The holdings that fall outside cash and cash equivalents still need names and still need a place on the balance sheet. A business whose investments line is completely empty is saying something too, and an empty line turns out to be readable.

What makes a holding marketable?

Start with a stall rather than a security. Forty people walk past a bus depot every minute and one of them wants tomatoes, so a vegetable seller there can turn a crate into money in an hour. The same crate in a village with eleven households and no bus is the same crate, in the same condition, and it is not sellable in an hour at anything like the same price. Nothing about the tomatoes changed. The crowd changed.

MarketabilityThe ease with which a holding can be turned into money by selling it to somebody else. It depends on the market the holding trades in as much as on the holding itself. is a property of the market as much as of the instrument. The same holding can therefore be marketable in one period and not in the next. Three conditions have to hold together. First, an established market exists where the holding actually changes hands, so a price is being formed by somebody other than the holder. Second, there is enough activity in that market that a sale of the size being contemplated does not itself move the price much. The second condition is the one people forget: a share that trades four times a month is quoted without being marketable in any useful sense. Third, nothing prevents the holder from selling, whether that is a lock-in written into the terms, a pledge to a lender, or a restriction in the constitution of the company whose shares are held.

A marketable securityA holding in shares, units or debt instruments that can be sold readily in an established market. The word marketable describes how easily it can be sold, not what it will fetch. is a holding that satisfies all three. Notice the three silences in that definition. Marketability says nothing about how long the business intends to keep the holding, nothing about what the holding is worth, and nothing about whether the price will hold. Marketability is a statement about the exit being available, not about the exit being attractive.

What Are Short-Term Investments, and Is That a Presentation Question or a Measurement One?

Now the second term, and a boundary drawn by a different question. A short-term investmentA holding the business expects to turn back into cash within its normal trading cycle or within twelve months of the reporting date, whichever is longer. It is presented among current assets. is a holding the business expects to convert into cash within its operating cycleThe time a business takes to go from buying materials to collecting the cash from selling what it made with them. Where that stretch is longer than a year, the longer stretch is used to split current from non-current. or within twelve months of the reporting date, whichever is longer, and it is presented among current assetsAssets expected to be turned into cash, sold or used up within the normal trading cycle or within twelve months. Everything else is non-current.. Two facts decide it and no third one comes into it: what the business intends to do with the holding, and when the holding matures if it matures at all.

Short-term investment is a presentation category and not a measurement one. The category decides which half of the balance sheet a holding sits in, and settles nothing whatever about the amount at which the holding is carried. Readers go wrong at this point more often than anywhere else, and the mistake is understandable. Both questions are asked of the same holding on the same date by the same accountant. Ask them separately. Question one: when is this expected to turn back into money? Expected timing puts the holding above or below the line dividing current assets from non-current. Question two: what is this carried at, and where does a change in its worth go? The carrying amount comes from the two classification tests and follows one of three routes. A holding can be a short-term investment for presentation while being measured under any one of those routes, and there is no combination the two questions rule out.

The independence shows in practice. A deposit maturing in nine months is a current asset and is carried at amortised cost. Units in a fund redeemable on demand are a current asset and are carried at fair value with the movement in profit or loss. Shares in an unlisted supplier that the business has held for nine years are a non-current asset and are carried at fair value too. The presentation answer and the measurement answer were reached by completely different reasoning in every one of those three, and knowing either one of them says nothing at all about the other.

Where does the boundary against cash equivalents actually fall?

Two conditions were set out earlier for a cash equivalent, and only one of them does the work here. A cash equivalent must be readily convertible into a known amount of cash, and must carry an insignificant risk of a change in value. The word known carries the weight. The test is not whether money can be got out quickly. The test is whether the amount can be stated today.

A marketable security clears the sellable test and fails the known amount test, and that single failure is what keeps it out of cash and cash equivalents however fast it could be sold. Think of two envelopes on a desk. One holds a receipt from a bank promising Rs 2,00,000 in eight weeks. The other holds shares that a busy market would buy inside ten minutes. The shares are quicker. The receipt is certain. Only the certain one is a cash equivalent, and a reader who ranks the two by speed has ranked them by the wrong property. Speed of sale is a property of the market. Certainty of amount is a property of the promise, and only a promise can be certain.

The boundary is not, for the same reason, a maturity rule wearing a disguise. A short remaining life leaves little room for the amount to move, so a maturity of a few months is evidence that a holding will return a known amount. Evidence is not the test. Quoted shares can be sold this afternoon and have no maturity at all, and no length of time makes their proceeds knowable in advance.

How do four holdings sort across both boundaries at once?

Four hypothetical holdings run across every question asked so far. None of them is held by Anjani Stationers Private Limited, an invented notebook and exercise book maker whose own accounts are worked below. The four exist so the sorting can be seen.

Read the total row slowly. The practical consequence is in it. Four holdings, one owner, Rs 23,00,000 between them, and they appear on two different parts of the balance sheet with Rs 10,00,000 above the line and Rs 13,00,000 below it. Nobody split them by size, by risk or by what they are worth. The split came entirely from when each one is expected to turn back into money. A reader who adds an investments line from the current side to an investments line from the non-current side has recombined something the balance sheet separated on purpose, and has thrown away the only information those two lines were carrying.

What does a large holding of short-term investments tell a reader?

Suppose a balance sheet shows a substantial current investments line. The instinct is to read a large balance as strength, and the instinct is not silly. Money not needed for anything is a comfortable position for a business to be in. The line is also, on its own, close to uninformative. Three quite different situations produce the same line.

The first is a business that generates more cash than it currently needs, so the balance builds up quietly over several periods and the trend is a gentle climb. The second is a business holding cash against a commitment it has not yet made: an acquisition being negotiated, a plant being built next year, a large repayment falling due, a court case with money set aside behind it. The third is a business that raised money it has not deployed yet, so the balance appeared in one step at the moment the funding landed. The balance alone distinguishes none of these three, and a reader who takes the line as evidence of cash generation has skipped the step where they find out which of the three they are looking at.

Three things separate them, and none of them is on the face of the balance sheet. The commitments and contingencies note shows whether the money is already spoken for. The recent financing history, read from the financing section of the cash flow statement, shows whether the balance arrived from trading or from a fundraise. And the trend across several periods shows whether the balance built or appeared. The trend is the fastest of the three to read. A balance that climbs Rs 4,00,000, Rs 9,00,000, Rs 15,00,000 across three years is telling a different story from one that goes nil, nil, Rs 40,00,000, and the two look identical on the last balance sheet.

What does holding none of them tell a reader, and what does Anjani Stationers hold?

Now the other direction. Anjani Stationers has an investments line worth turning to. The business holds no marketable securities. The business holds no short-term investments. Cash and cash equivalents stand at Rs 5,00,000 at the year end, down from Rs 7,00,000 at the start, and the only investment line of any sort is the Rs 21,00,000 paid for 70 per cent of Chitra Binding Works. The Chitra Binding Works holding is a subsidiary carried at cost, and a subsidiary is a different kind of holding altogether.

Somebody meeting that for the first time reaches for the word weak. Resist it, and go and find the money instead. An absence of investments is itself a reading, and in Anjani Stationers' case it is fully explained by a working capital cycle of 143.1 days that has the cash locked inside it. Here is where the money is. Net receivables of Rs 86,00,000, being Rs 95,00,000 gross less a provision of Rs 9,00,000. Inventory of Rs 28,00,000. Receivables and inventory together are Rs 1,14,00,000 sitting inside the cycle against total assets of Rs 1,80,00,000. Very nearly two thirds of everything the business has is locked in there. A business with two thirds of its assets in receivables and stock has no surplus to hold anywhere else, and saying so is a description rather than a criticism.

The cycle itself is worth working. A number carries more once it has been built. Days sales outstanding is gross receivables of Rs 95,00,000 over revenue of Rs 2,70,00,000, times 365, giving 128.4 days. Days inventory outstanding is Rs 28,00,000 over the cost of materials consumed of Rs 1,48,50,000, times 365, giving 68.8 days. Days payable outstanding is Rs 22,00,000 over the same Rs 1,48,50,000, times 365, giving 54.1 days. Adding the first two and taking away the third: 128.4 plus 68.8 less 54.1 is 143.1 days, the published figure, lengthened from 129.6 days the year before. The base matters: receivable days run on revenue while inventory and payable days run on the cost of materials consumed, and using revenue for all three gives different numbers that agree with nothing.

So look at the balance sheet as a picture of where the money actually is. Rs 1,14,00,000 in the cycle. Rs 21,00,000 in a subsidiary bought at the start of the year. Rs 5,00,000 in the bank. Rs 40,00,000 in everything else the business needs to operate. And nothing at all in investments. Nothing was left over to put there.

What funded the gap the cycle created?

A cycle of 143.1 days does not fund itself, and neither does a season. Anjani Stationers sells school notebooks, so its buying, printing and binding happen months before the schools open and months before any of those schools pay. Something has to cover the stretch, and in this case it is a cash credit facilityA borrowing arrangement with a bank that a business draws on and repays as it needs, up to an agreed limit, rather than taking as one lump. Interest is charged on what is actually drawn. with a bank, drawn through the school-supply season and cleared before the year end, averaging about Rs 26,40,000 across the year.

The Rs 5,00,000 of cash on the year-end balance sheet therefore sits beside a facility that was drawn for most of the twelve months and happened to be at nil on the one date the balance sheet was written. That is not a criticism either; it is the ordinary shape of a seasonal business, and a reader who saw only the year-end figures would have no idea it happened. The pattern matters for one reason. A business that spends most of its year borrowing to fund its cycle has no surplus at any point in that year to hold as short-term investments, so the empty line is not a year-end coincidence. The investments line is empty throughout.

Take three settings and compare them. At the default the published position is reproduced exactly: 128.4, 68.8 and 54.1 days giving 143.1, with Rs 86,00,000 of net receivables, Rs 28,00,000 of inventory, Rs 22,00,000 of payables and Rs 92,00,000 inside the cycle. Pull the cycle to 130 days through collection and Rs 9,69,041 comes out of receivables. Pull it to the same 130 days through inventory instead and only Rs 5,32,973 comes out. Receivable days are measured against revenue of Rs 2,70,00,000. Inventory days are measured against the cost of materials consumed of Rs 1,48,50,000, and the smaller base makes the smaller day, so the same 13.1 days is worth about 1.8 times as much through collection as through stock. The base under each component decides what a day of it is worth, and the whole difference is arithmetic.

Ind AS 7, 109 and 113 and Schedule III: which document settles what?

The separation between when a holding returns and what it is carried at is a principle rather than a local rule, so it holds in any jurisdiction. India carries the principle in four named documents, and each of them settles a different part of it.

How is what is actually inside an investments line checked?

Two businesses can report the same figure on the same line and hold entirely different things. One holds bank deposits it can name to the rupee. The other holds shares in three unlisted companies nobody outside the boardroom has valued. Both lines say investments, both carry the same amount, and one of them is a number and the other is an opinion. A single balance sheet line can contain wholly different things across two businesses, and nothing on the face of the balance sheet separates them.

The investments note is where the line comes apart, and it gives four things. The composition shows whether the amount is deposits, funds, debt instruments or shares. The quoted and unquoted split is the fastest signal in the note. An unquoted holding has no market price standing behind its carrying amountThe amount at which an asset is recorded on the balance sheet after any adjustment for impairment or for a change in fair value. It is what the balance sheet says, which need not be what the asset would fetch.. The measurement basis for each class shows where a change in worth is going. And the fair value hierarchy table, where any amount not backed by a quoted price is placed at a level and the inputs behind it are described. The four parts of the note establish what the line contains. The line on its own establishes only its size.

Who reads an investments line, and what do they do with it?

Leave the mechanism for a moment. Four different people open the same balance sheet in the same week, and none of them is reading the investments line for the same reason.

A lender reads the line for what it could be turned into if the business stopped paying, an analyst reads it to find out whether the business has money spare or money spoken for, a supplier reads it as one input to how long a credit period is safe to offer, and Vaidehi Rao reads it because she has to explain to a bank why the line is empty. Watch each one work. The lender's question is narrow and practical: if a repayment came under pressure, what here could be turned into money quickly and reliably? A deposit at the same bank can be set against the loan almost mechanically. Quoted shares could be sold, at whatever the market pays that week. Selling unquoted shares in a supplier requires finding a buyer for a minority stake in a private company, so those shares are worth very little to a lender under pressure. Same line, three completely different answers.

The analyst's question is the one worked at length above. Money spare or money spoken for, and the commitments note settles it in about ninety seconds. The supplier's question is the plainest of the four: a business with visible liquid holdings and a short cycle is a different credit proposition from a business with an empty investments line and a 143-day cycle, and the second one is not a business to refuse, it is a business to think about terms with. And Vaidehi Rao, as finance controller of Anjani Stationers, has the most immediate use of all. When the bank asks why there are no investments, her answer is not an apology. The answer is Rs 86,00,000 of net receivables, Rs 28,00,000 of inventory, a cycle of 143.1 days that lengthened from 129.6, a facility drawn through the season at an average of about Rs 26,40,000, and operating cash of Rs 36,30,000 against profit after tax of Rs 30,00,000. Every rupee accounted for, none of it available to invest.

Anjani Stationers Private Limited, Chitra Binding Works and Vaidehi Rao are invented.
Educational material. Not advice on any investment, tax, budget or market position.