Tech Sector Most Efficient at Turning EBITDA into Cash Flow

The technology sector of the U.S. economy grew its corporate cash position again in 2016, amassing nearly half of the total accumulated for nonfinancial companies, and is likely to add more to the pile this year.

The top five most cash-rich companies in the U.S.—Microsoft Corp., Google Inc., Cisco Systems Inc. and Oracle Corp.—kept $594 billion in cash in 2016, or 32% of the total U.S. nonfinancial corporate cash, according to a recent report by Moody’s Investors Service. "The concentration of cash among the most cash-rich U.S. companies continued to grow last year, as did the proportion held by the technology sector, which accounted for close to half of the total," said Richard Lane, Moody's senior vice president. "Despite strong returns of capital to shareholders, we expect, absent tax reform, the technology sector's cash concentration to grind even higher over the next year because of its strong cash flow generation."

The health care/pharmaceuticals, consumer products, energy, automotive and manufacturing sectors all trailed tech in terms of cash holdings, analysts said.

Aggregate cash relative to debt climbed 37% in 2016, up from 34% in 2015 and higher than the 35% average over the past decade, Moody’s said. Cash flow from nonfinancial corporate operations dropped nearly 6% in 2016 to $1.45 trillion. Also, spending on plants and equipment decreased 18% last year, with reduced energy sector spending leading the pack.

“Reflecting the decline in cash flow from operations that was more than offset by reduced capital expenditures, U.S. nonfinancial corporates generated a record $720 billion in discretionary cash flow in 2016, up 11% from 2015,” Moody’s said. “The technology sector has, on average, turned 72% of EBITDA into discretionary cash flow in the past 10 years, making it the most efficient sector in this regard.”

– Nicholas Stern, managing editor

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