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Current Cash Flow-Debt Ratio Resembles Last Two Recessions

Current Cash Flow-Debt Ratio in emerging markets resembles recent recessions.

Why Chinese Debt Should Push Your Company to Improve Cash Flow

Emerging market corporate debt is now more than 75% as a percentage of gross domestic product, according to reports from the International Monetary Fund. Countries that include China are sailing toward plans to refinance before much of the debt comes due in 2021, but shifting fed policy could tighten future lending opportunities from central banks. This concern in emerging markets may seem far removed from what’s happening in your day-to-day business. If you’re a closely held company, how does it affect you if a Chinese company is over-leveraged? Here is the problem. You may have large customers — or customers of customers — that rely on these emerging markets for revenue growth. You may not know the fiscal approach for these companies in the next five years, but a non-payment or slow payment from one of your big customers could spell hardship, if not a disaster for your company. This recent article from Reuters adds context to rising interest rates coupled with high corporate debt. The buzz word is “complacency.” The U.S. stock market has showed continued growth despite political uncertainty and slow actual GDP growth. The last major incidences for market complacency were 1993-1994 and 2006-2007, precisely before two major economic contractions. Remember that? What led to the recession in 2008 was the number of companies around the world with high levels of debt and no cash flow to pay the piper. Analysts remind us that we’re in the third longest U.S. economic expansion in history. It could take months for volatility to rise, but…

Jonathan Tepper, co-founder of Variant Perception Research, says the two best long-term predictors of volatility are the credit cycle and economic volatility. “High leverage always leads to higher volatility as the credit cycle matures. And we’ve been levering up for the past eight years since the 2008-09 recession,” he said.

As we’ve written in previous blog posts, a record $2 trillion in corporate debt is coming due. Higher interest rates will make it harder to refinance that debt. The best actions to take now to sustain the health of your company are to pay down your own company’s debt, improve cash flow (and cash reserves) and perform consistent predictive credit analysis on your customers. You can’t act if you don’t know what’s coming. The real key to managing accounts receivables is to use predictive analytics. That way, your company can negotiate better credit terms long before your customers make their problems your problems. Explore your options now. Download “Corporate Debt is Maturing and Cost of Old Debt is Rising: Are You Ready?”

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