Berkshire Hathaway's Cash Pile Now Earns More in a Year Than Most S&P 500 Companies Report in Total Profit. Here's the Math.

Written by Neil Patel for The Motley Fool->

Berkshire Hathaway generated $3.1 billion in earnings from its cash balance in the first three months of this year.

Buffett and Abel would ideally like to allocate this capital to higher-returning opportunities.

This business operates with a substantial financial cushion that reduces risk and allows it to be aggressive when opportunities come up.

Warren Buffett might no longer be the CEO of Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB), but the business still has the same issue it had under the leadership of the Oracle of Omaha. It has more cash than it knows what to do with.

But this deep liquidity has become a source of meaningful profit. In fact, Berkshire Hathaway earns more from its cash pile in a year than most S&P 500 index companies report in total earnings. Here's the math.

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As of March 31, the Nebraska conglomerate had $397 billion in cash, cash equivalents, and short-term U.S. Treasuries on its balance sheet. That figure has trended higher in recent years, as the company has been a net seller of stocks.

Instead of simply holding dollars, this huge sum is primarily allocated to U.S. Treasuries. So, Berkshire is able to earn a risk-free return on this capital. During the first quarter of this year, the interest income it collected, coming mainly from its Treasury holdings, was $3.1 billion.

If rates go up, it's no surprise that this figure also rises. With the federal funds rate currently not far from its highest level in the past 15 years, Berkshire Hathaway's balance sheet benefits.

On an annualized basis, the conglomerate generated $12.4 billion in after-tax profit in the first quarter, funded by its cash pile. This is higher than most companies in the benchmark S&P 500 index. In fact, it's about the same as Walt Disney's trailing-12-month net income.

Buffett, who is still chairman, and CEO Greg Abel certainly wish they didn't have a large cash hoard. The ideal situation is for the business to find ample opportunities to deploy this capital at a higher potential rate of return. That's the ultimate objective that can drive shareholder value for Berkshire Hathaway's investor base.

The fact that there is so much cash on the balance sheet is a clear sign of the lack of opportunities the market is presenting right now. As a company with a value-focused philosophy, Berkshire Hathaway is cautious due to the elevated valuations it's been seeing.

The almost $400 billion in cash, cash equivalents, and Treasuries, however, can still be viewed in a very positive light, even though Berkshire is not earning the returns it could if its cash were actually used to buy stocks or entire businesses. This gives the conglomerate a substantial financial cushion, not only making it a safer company, but also allowing it to act quickly when opportunities eventually present themselves.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Walt Disney. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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