Corporate Debt on the Rise

Corporations frequently place themselves in debt in order to finance potentially profitable ventures. So, it’s important not to conflate debt level with a corporation’s overall financial health or profitability, as debt could be a temporary cost for a net-profit. Problems can arise, however, when a corporation’s debt greatly exceeds its liquid assets. An excessive debt-to-cash ratio can cause a corporation to default on its loans, which often results in bankruptcy.

U.S. corporations owe roughly $6.3 trillion. This is a record high. Yet as we already established, debt level alone isn’t reason for alarm. Debt-to-cash ratio is a better indicator of financial security. Corporate America’s debt-to-cash ratio is currently at a stable ratio of 33 liquid dollars for every 100 dollars owed. Thus, everything appears fine on the face. Yet things become grimmer when one looks at individual companies’ debt-to-cash ratio. The vast majority of the liquid cash in corporate America is held by the top 25 cash-holders. Translation – a couple corporations have most of corporate America’s liquid cash. On an equally troubling note, many of the companies who aren’t in the top 25 cash-holders have incurred massive debt to finance ventures such as buyouts. While these ventures may be profitable in the long-run, they do not increase a company’s liquid cash. Translation – many corporations owe a lot of money and don’t have liquid cash. For example, speculative borrowers – high risk borrowers – owe $8 for every $1 of liquid cash. That’s a very high debt-to-cash ratio, placing these companies at risk of default. This risk is especial acute in light of the feds decision to raise interest rates.

A high debt-to-cash ratio isn’t dangerous for corporations alone. Your own financial health is at risk if you’re struggling with excessive debt. Bankruptcy can help you break the chains of debt. Feel free to give our office a call if your interested in a Modesto bankruptcy attorney.