January 21, 2021
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 last year during the recession from 42.6% at the end of 2019 to 46.3% in the second quarter. Corporations needed to borrow to make sure that they had ample liquidity to keep them afloat until the corona virus finally got under control which is expected to take place around the middle of this year. That ratio declined somewhat in the third quarter of 2020 to 45.2%. It should continue to fall as we move throughout 2021 as both life and the economy begin to return to normal. This compares to an average ratio of debt to net worth since 2000 of 41.0%.