Avoid Being Over-Leveraged During Periods of High Interest Rates and Market Downturns

Debt is usually categorized into “good debt” and “bad debt.” Being over-leveraged means taking up too much debt especially “bad debt” to the point where it starts having negative repercussions. This can occur to both corporations and even a regular person. The total corporate debt is around $9 trillion which is a huge threat especially since we have increasing interest rates and the potential for a market downturn. As the interest rate continues to rise as expected in 2019, this debt will continue to eat into profit margins. When you couple that with a market downturn where the sales and revenue of these corporations decline, then it becomes a very difficult situation.
An interesting case that analysts have talked about is the Netflix debt situation. Netflix is a $102 Billion company by market cap with a 83.95 P/E ratio. Some folks might call the company over-valued due to the really high P/E ratio. Being a growth company, I am not surprised by the high P/E but my worry is the amount of debt levels Netflix has. As of September 30, 2018, Netflix has over $8 Billion in long-term debt and $18 Billion in total liabilities with a long-term debt to equity ratio of 1.81 as of 2017. In October 2018, Netflix announced plans to issue an additional $2 Billion in Bonds. With the increase in competition, I do not believe this is sustainable since free cash flow is still negative and Disney will be releasing its own streaming service in 2019 and the most beloved marvel shows will be making their way to Disney+.
The idea of being over-leveraged also applies to the regular person as taking on too much debt during an economic turmoil usually leads to a catastrophe especially if those individuals lose their jobs. It is important to tackle and eliminate as much debt as you can in order to secure your financial future. Debts such as credit card debt are considered “bad debt” since the interest rate for those cards are typically 20%+ and do more harm than good. I previously wrote about ways to get rid of debt and hope you find the post useful as you tackle yours. My favorite platform to manage my finances is through Personal Capital and it helps to keep track of assets, income, liabilities, as well as daily expenses.

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