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Thursday, November 15, 2012

Corporate debt

I often hear the pundits on TV talking about how much cash corporations have.  They say that balance sheets are great and this will cushion a recession if we have one.  You might have realized by now that I like data, not opinions.  So lets look at the data.  The latest figures are somewhere around $2 trillion in cash.  That sounds like a lot of money, but how much debt do they have.  Check out this chart.


Corporate debt in the U.S. is 75% of GDP.  Here is the GDP data.

 A quick calculation means that corporate debt is about $11.8 trillion.  Corporations have almost 6 times more debt then cash.  We learned from the Enron debacle that corporations can have off balance sheet debt. It is possible this debt figure could even be low.  Maybe companies are hoarding cash because they are worried about being able to service the debt if the economy turns down again.  What makes this whole thing a little more skewed is that there are a few companies like Apple that have a huge amount of cash and very little debt.  I do not know what the numbers are now, but last year I saw a study that showed that 50  companies had almost 50% of the cash.  That does not leave all that much for everybody else does it.  The numbers are probably still pretty similar.  The debt to cash picture is not quite as rosy as the pundits would have us believe.  Whether this cash helps to minimize a recession remains to be seen.  Since so many companies are already announcing cost cutting measures, that may not be the case.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.