Report Find US Corporate Debt Levels ‘Alarming’

Rising corporate debt levels among the largest public companies in the US suggest that the old adage “cash is king” is being replaced by “debt is king”, according to REL.

REL, which is a division of The Hackett Group, has published its 17th annual US working capital survey in conjunction with
CFO Magazine

The study of the working capital performance of nearly 1,000 of the largest US public companies found that they continue to take on “alarming” amounts of debt. Debt rose by over 9% in 2014 to nearly US $4.6 trillion, with companies leveraging low interest rates to fund increased investment activities.

At the same time, reports REL, companies once again made almost no improvement in working capital management, doing little to generate cash internally by optimising how they collect from customers, pay suppliers, and manage inventory.

Companies that doubled their debt or more since 2007 saw their working capital performance worsen dramatically, REL’s research found, while companies that decreased their debt over the same period saw a significant improvement.

Cash on hand decreased for the first time in a decade in 2014, largely due to expenditures on acquisitions, although it has risen by 74% since 2007, and at US$932bn remains near its all-time high. Capex spending also continued its comeback, rising by 11% in one year.

For 2014, REL found that companies in the study could improve their cash flow by over US$1 trillion, or 6% of the US gross domestic product (GDP), by matching the performance of top companies in their industry. Inventory optimisation represents the largest share of this opportunity.

Top performers – seven times faster at converting cash into cash than typical companies – now hold less than half the inventory (22.2 days versus 50.7 days), while collecting from customers over two weeks faster (24.8 days versus 42.6 days) and paying suppliers 40% slower (55.4 days versus 39.5 days). The cash conversion cycle (CCC) improved only marginally in 2014, shrinking by .7 days or 2%.

“US companies are clearly enjoying all the benefits of the recent economic acceleration,” said REL associate principal Analisa DeHaro. “However, their addiction to debt, and their apathy toward true cash flow management, is very disconcerting.

“Today, money is cheap. But there’s no question that interest rates will rise, possibly sooner rather than later. And when that happens, companies focused on optimising their CCC will be best positioned to mitigate their risk, continue to fund investment, and outperform their peers.”

The study managed to find several industries, including technology hardware and biotechnology that appeared to go against the trend, significantly improving working capital performance last year. Industries that showed the largest decline in working capital performance in 2014 included diversified consumer goods, automobiles, construction and engineering.


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