Saga of Financial Markets


Last updateSat, 29 Jul 2017 12am

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US Corporate awash with cash?

We have been ‘brain-washed’ by from the media to brokers that US corporate are deleveraging and ‘awash with cash’.  According to Moody’s, by the end of this year, America’s non-financial companies will have an aggregate $1.3tn pile of cash on their balance sheets.  Companies, therefore, is a bright spots relative to overly geared sovereign and households…

However, according to Financial Time’s Lex, it is not true.   The reason is there is a confusion between gross cash and net cash positions.  Overall debt positions relative to assets (about 33%) or to book values (50%) are near all-time high levels for US non-financial companies.  According to National Accounts data, the aggregate corporate net debt is at about 80% of gross domestic product.

Smithers & Co has another way to explain why there might be confusion about gearing levels. If you consider gross domestic debt relative to asset values, then it looks like leverage has fallen by a quarter since the early 1990s. The trouble is that historic book entries are not adjusted for inflation. In the two decades since, inflation has been low, so the real worth of assets is relatively close to book values. Leverage only appears low relative to history because back then book values were low relative to real asset prices. Adjusting for inflation, this measure of leverage is again almost as high as it has ever been.

What does it means?  Two implications on companies' cash flow:

  1. If the company is not awash with cash, with a rise in interest rates, it could ‘hit’ the company cash flow.
  2. With corporate margins near historic highs, as margins track revenue growth, with higher interest rate costs and falling profits, company highly geared could have cash flow problem.

Reference:  Financial Times, 2012-04-08, “Corporate leverage: don’t believe all you hear”