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Lean years ahead

The lagged effect of rate hikes is little by little permeating into the economy and the markets. It is true that some companies have a positive net interest earnings, because they have locked the rate on their issued debt at very low rates and they are investing their treasury at higher rates on T-bills or other short term paper. But the tables are starting to turn. Debt maturities are coming closer and already the smaller companies are starting to feel the squeeze in their income statements. The number of #bankruptcies is going up month by month and sooner rather than later rating agencies will start their reviews for potential downgrades. It’s part of the cycle. The interest coverage ratio for big caps is 8.4X (EBIT/int expense), while for small caps it’s 2.0X. And 45% of the companies in the Russell 2000 are unprofitable. Equities are adjusting accordingly.

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