Dining On Debt

Dining On Debt

almost 5 years ago1 min

As the global economy’s growth slows, one thing keeping some investors up at night is the level of corporate debt. In the US, it’s at an all-time high compared to GDP – and has the potential to trigger a recession.

Financial institutions not included
Financial institutions not included

But analysts at Deutsche Bank aren’t worried. They think investors are looking at the wrong thing…

🔍 Deutsche thinks a more appropriate measure to use is “net debt”, which subtracts existing cash from debts – and that this should be compared to a company’s own profit, rather than GDP, since that’s the pool from which debt must be serviced and repaid.

On this measure, corporate debt looks more manageable
On this measure, corporate debt looks more manageable

Conducting the same analysis on a sector level shows that those sectors with the highest leverage also have the most stable, predictable cash flows. Like the Lannisters, then, they should be the most reliable when it comes to repaying their debts 🛡️

Utilities and real estate have high leverage, but stable cash flows
Utilities and real estate have high leverage, but stable cash flows

Investing in big US companies’ bonds might not be as risky as some think – even as some more cyclical sectors’ debt has increased since 2011…

Industrials’ leverage has risen, for example
Industrials’ leverage has risen, for example

The bigger risk might be in smaller companies’ debt, according to analysis from Société Générale. While Russell 2000 companies’ earnings hit around $200 billion last year, their debt ballooned to over $500 billion. And these companies’ small size means fewer financial shovels with which to dig themselves out of any future financial troubles… 🙉

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