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- Cash trap refers to a situation in which a company experiences a significant slowdown in its cash flow, leading to restricted liquidity and financial flexibility. This occurs when a substantial portion of a company’s financial resources becomes tied up in non-liquid assets, such as inventory, accounts receivable, or long-term investments.
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What is trapped cash?
Is trapped cash equivalent to earnings reinvested overseas?
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This refers to a business where whatever cash is generated is needed for maintaining its operations. Such businesses typically have low, if not negative, profitability and are sustained by resources allocated from the corporate level. Therefore, a business in a cash trap is not creating shareholder value and may actually be destroying it.
- Tanya Sammut-Bonnici
Oct 1, 2017 · The authors provide practitioners with a clear definition of trapped cash, permanently reinvested earnings, and foreign cash. Trapped cash comprises cash and cash equivalents generated by foreign operations and held outside the United States because of repatriation tax concerns.
This scenario is known as a “dividend trap” where a group is net cash and profit generative but cannot lawfully pay a dividend due to accumulated accounting losses. Dividend traps impact a variety of stakeholders.
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We define trapped cash as cash and cash equivalents generated by foreign earnings and held by U.S. MNC’s foreign subsidiaries due to concerns over repatriation taxes, and explain why trapped cash, permanently reinvested earnings, and foreign cash are not synonymous.
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Trapped cash typically occurs when countries have insufficient hard currency reserves. It normally results in the inability to remit currency offshore to pay for transfer pricing, intercompany settlements, and dividends. These countries are rare and include Angola, Argentina, and Egypt.
Apr 9, 2015 · Consistent with expectations, we observe firms with high levels of trapped cash make less profitable acquisitions of foreign target firms using cash consideration (lower announcement window returns, lower buy and hold returns, decreased ROA).
below are some examples of cash that might be considered by a buyer as trapped if they could not be readily extracted without harming the business. • Cash in tills and petty cash. • Cash held by overseas subsidiaries where there may either be a tax cost of extracting cash from the subsidiaries (see sections International acquisitions and
