Does high inflation help or hurt companies with huge cash reserves?

Question

I've been told that high inflation rates lead to high cost of capital for businesses (in one of the answers here - High Leverage Inflation Hedges for Personal Investors).

My question is:

Consider a company like Microsoft, with billions and billions of dollars in cash on hand. What is the impact of high inflation on this company? Does it hurt this company, because cash is trash and is now worth less, or does it help this company, because that amount of cash becomes a competitive advantage (other companies would need to borrow at high interest rates to achieve the same sized warchest)?

I'm not asking if MSFT is a good investment, pretend it's any company you like with high cash reserves.

Answer 1

Inflation will damage the value of those cash reserves. This will harm the company's value. (Other factors may or may not be harmed. or helped.)

Borrowing costs may be related to inflation, but they're not directly tied. Inflation happens, in fact, when it's easy to borrow money and more money gets created than new economic activity. (Also, if a competitor really needs to raise money, they can also issue new equity. It's not all borrowing.)

Answer 2

Inflation is bad for people with lots of cash assets. It's good for debtors, particularly debtors with unsecured debt.

Answer 3

This is a reasonable question about inflation. I would just like to note that inflation is nearly zero at the moment. And interest rates are very low. For a stable enterprise, borrowing cash is very easy right now. Naturally, things could change in a year. But the reason a company like Microsoft (but not just them) might hoard cash right now is that it gives them weight for buying up smaller firms, muscling rivals, and signaling their comfort level with the way things look for them. It could also be because they are out of ideas for what to invest in, and/or are waiting for conditions to change before making any big decisions. But with an interest rate at close to zero, and an inflation rate at close to zero, at the moment, inflation is not going to be a consideration in evaluating such a company.