Corporate America is swimming in cash. There is no great news about this, and no great mystery about where it came from. Seven years of historically low interest rates will prompt companies to borrow.
A new development, however, is that investors are starting to ask in more detail what companies are doing with their cash. And they are starting to revolt against signs of over-leverage.
That over-leverage has grown most blatant in the last year, as earnings growth has petered out and, in many cases, turned negative. This has made the sharp increases in corporate debt in the post-crisis era look far harder to sustain. Perhaps the most alarming illustration of the problem compares annual changes in net debt with the annual change in earnings before interest, tax, depreciation and amortisation, which is a decent approximation for the operating cash flow from which they can expect to repay that debt. As the chart shows, debt has grown at almost 30 per cent over the past year; the cash flow to pay it has fallen slightly.
This post was published at David Stockmans Contra Corner on April 27, 2016.
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