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While corporate debt has grown notably since the financial crisis, earnings have grown as well, and debt service ratios still appear manageable.
Debt Remains Manageable MainIncreased borrowing in recent years has lifted S&P 500 corporate debt to a level last seen before the 2008 financial crisis. For some investors, rising debt may raise questions about the health of corporate America and could indicate deterioration in corporate balance sheets and a greater risk to companies that have to service their growing debt. But do higher debt levels necessarily indicate that corporate financial health has declined? By some measures at least, that doesn’t appear to be the case.

As illustrated above, debt actually remains relatively low compared to corporate earnings. In the two decades leading up to the financial crisis, S&P 500 companies held debt that was three to five times their earnings. Despite the increase in indebtedness in recent years, today, it’s less than two times S&P 500 earnings. A lower debt-to-earnings ratio indicates that profits are higher relative to outstanding debt and a greater ability for corporate borrowers to meet their debt payments. Exceptionally low interest rates also help to hold down the cost of servicing that debt.

The bottom line is corporate balance sheets remain relatively healthy, in spite of rising indebtedness. Compared to the growth of the economy in the past decade and improvement in corporate earnings, the growth in corporate debt doesn’t appear to be as problematic as the aggregate debt outstanding alone would suggest.
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Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.