Losing Sight of Leverage?

Companies' cash levels are up, but so is total debt. Here are the 25 companies that have boosted net debt-to-EBITDA the most.
Vincent RyanAugust 10, 2011

While some shareholders focus on the cash that large companies are accumulating, they may be forgetting about the other side of the balance sheet. CFOs are not only building cash reserves, they are also taking advantage of low interest rates to leverage.

An examination of data provided to CFO by Capital IQ shows that 91 large, publicly held U.S. nonfinancial companies increased their net debt-to EBITDA ratios in the past year (as of Q1 2011). Companies had to have $500 million in revenue and $250 million in EBITDA to be included.

At the 25 firms that elevated net debt-to-EBITDA the most (see chart below), the median increase in total debt was 40%. EBITDA grew faster than total debt at just 5 companies: Thermo Fisher Scientific, NRG Energy, Avon Products, Arrow Electronics, and Lubrizol. A fall in EBITDA helped explain the ratio increase for 3 firms — Constellation Energy, Telephone & Data Systems, and Kellogg — but those 3 also raised their total debt levels.

The absolute net debt-to-EBITDA levels of these 25 companies are not excessive. Nine of them had net debt-to-EBITDA of below 1%, and the average was 1.55%. But that’s an increase from 1.05% the year before.

The debt service coverage ratios of these companies are healthy; it will be easy for them to stay on top of principal and interest payments. But their net debt-to-EBITDA numbers could jump if cash flow falls, cash resources are drained, or CFOs add further to leverage.

Clearly, these companies are not in a danger zone. But the data makes a salient point: many U.S. companies have exhausted their efforts to improve the other components of the sustainable growth formula — profit margins, dividend policies, and total asset turnover. Unless CFOs wish to sell new equity shares, that leaves one choice: increase financial leverage.

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