June 9, 2022
Economists like to keep an eye on the amount of leverage amongst corporations. When corporations take on huge amounts of debt in relation to their net worth, any economic downturn will be much more severe than it would otherwise be as corporations become unable to service their debt from cash flow.
This ratio rose sharply in the first half of 2021 during the recession from 42.6% at the end of 2019 to 46.9% in the second quarter. Corporations needed to borrow to make sure that they had ample liquidity to keep them afloat until the corona virus was finally got under control. Now the vaccines have done their job and the economy has rebounded sharply. As a result, corporate borrowing as a percent of net worth has fallen to 40.6%. This compares to an average ratio of debt to net worth since 2000 of 41.8%.
Stephen Slifer
NumberNomics
Charleston, S.C.
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