Corporate debt hit a record high last year as the health of the market has come into question.
Despite earnings growing at a sluggish pace, corporate debt in nearly every sector has outpaced 2006. Corporations in consumer staples, healthcare, materials, utilities and energies have taken on more debt in 2016 than they did in 2006.
According to the data, nearly two-thirds of private firms in the Dow 30 have higher ratios than they did in 2015. The companies that have leveraged up include Apple, Chevron, Caterpillar, McDonald’s, Verizon and IBM.
This could be a dangerous trend for businesses that have raised their debt obligations to historic levels, especially when interest rates start to go up and a recession hits the United States.
During recessions and economic downturns, the ratio of debt to corporate earnings generally peaks. However, during the current incarnation of an economic expansion, it has peaked, causing many investors to scratch their head.
Here is an interesting excerpt from a CNBC report:
“Over the last decade, total annual EBITDA for the S&P 500 as a whole rose and then flattened, while debt issuance has continued to take off in recent years. That means that the net debt over EBITDA ratio, or how many years it would take to pay off that corporate debt, has been driven up.”
Last year, we reported that $75 trillion worth of corporate debt, which is expected by the year 2020, may trigger the next financial crisis (SEE: $75 trillion corporate debt could fuel next financial crisis).
Unfortunately, there aren’t any signals that companies are starting to tackle their debt volumes.
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