Analysis: Even with COVID and Recession, Companies Are in Good Shape

How are corporate balance sheets overall after nearly 12 months of the pandemic?  They may be better than you would intuitively think. 

I show some charts below that addresses this question to a degree.

Shown in the chart above is the ratio of net interest expense relative to earnings before interest and taxes. Right now, this ratio is well below its average since 1970, and is in fact at its lowest reading since 2006.

This would indicate few problems here insofar as companies’ abilities to service their debt costs through their cash flow. Certainly, the very low interest rates are a major enabling factor here.

How about the outstanding maturity of the debt on corporate balance sheets?

The chart below shows that short-term debt as a percentage of total debt is still very low. As rates have dropped, companies have been very proactive in extending out their overall duration.

This is a good thing from a corporate finance standpoint, as it levels out the schedule of debt coming due and it gives firms more breathing room to address all of their capital financing needs.

Lastly, we look at asset liquidity. Below is a chart showing the quick ratio, which is defined as all liquid assets (typically cash plus short-term liquid investments) divided by short-term liabilities.

A quick ratio value of 1.0X is pretty good, and as seen in the chart we are up to that level right now.  We are well above the long-term average of approximately 0.6X to 0.7X.

In summary, U.S. corporate debt has increased quite a bit over the past few years. In fact, it is at nearly 100% of total GDP, at the high of its historical level.

But many ratios such as those shown above still look very good. Corporate balance sheets in aggregate are generally solid currently, even after nearly 12 months of a pandemic-induced recession.

The obvious risks to this more favorable picture going forward are things such as higher interest rates, rebounding bankruptcies, a renewed COVID slowdown, etc. These are all macro factors worth keeping an eye on over the next several months.

Gary has more than 30 years of industry experience, which includes research analysis and portfolio management for both retail and institutional accounts. He worked as a Senior Vice President at Wells Fargo Advisors and Wells Fargo Investment Institute for approximately 14 years in total, where he was a senior portfolio manager for both equity and asset allocation portfolios. He was also involved in investment manager due diligence and selection for the firm’s multi-manager portfolio models. Prior to joining Wells Fargo, Gary held senior-level investment management positions with several registered investment advisory organizations. He has been a Chartered Financial Analyst (CFA®) charter-holder since 1989. The CFA is a professional credential earned by investment management professionals after successfully passing three years of rigorous examinations and recording several years as a practising professional within the industry. Gary received his Bachelor of Science in Engineering from Purdue University and his M.B.A. in Finance from The University of Missouri. Additionally, Gary holds his FINRA SIE, Series 7 and Series 66 securities registrations as well as his Missouri Life Accident & Health insurance license. He is a member of the CFA Society of St. Louis and the Financial Executives Networking Group. He resides in Kirkwood, MO with his wife Kathy, and they have three adult age children, Aly, Ryan and Josh.