Analysis and credit-rating agencies have been wringing their hands for years about deteriorating corporate balance sheets and the more vulnerable financial position companies are in as a result.
Unable to sell stock because of the depressed market, companies have been getting themselves ever deeper in debt. In addition, corporate liquidity -- the ability of a company to put its hands on cash or quickly convert assets to cash -- has declined markedly over the last decade.
These are ominous signs, many observers contend. Henry Kaufman, the Salomon Brothers partner and chief economist who is also Wall Street's most followed guru, has lamented the balance-sheet weakening for years. So have the credit rating agencies such as Dun and Bradstreet and Moody's. Many more companies have had their credit ratings lowered than raised during the 10 years just past.
Now along comes the Conference Board, one of the leading business-sponsored economic research organization, to suggest that Wall Street's worries probable are overblown. Corporations are not as strong financially as they were a decade ago, but they are not doing as badly as it may seem, the board said.
In a new report, the Conference Board said that "technical and financial innovations in corporate finance call into question the extent of true weakening that has taken place in corporate financial positions."
The report admits that the "traditional measures of corporate financial structures, as well as measures of corporate liquidity, show a 'deterioration' over both the postwar period and the last decade."
Cash-like (liquid) assets of non-financial companies divided by their short-term inabilities fell from 0.79 to 0.64 between 1970 and 1979. In other words, in 1970 companies had on hand 79 cents for each $1 in bills due soon. By 1979 they had only 64 cents in cash.
Short-term debt as a percentage of total debt has risen markedly, while interest expenses are rising much faster than operating income.
But the Conference Board said new techniques and an altered corporate environment make the conventional barometers less meaningful.
Instead of keeping cash on hand, corporate managers now obtain loan commitments from their banks -- essentially guarantees, for a fee, that a bank will make a company a loan of a certain size."Since financial executives generally view these commitments as reliable sources of funds, the deterioration in traditional measures of corporate liquidity cannot be taken at face value," according to the Conference Board report, written by economist Vincent G. Massaro.
Furthermore, the study found, because companies anticipate inflation, it is to their advantage to get into debt, especially long-term debt, because the loans are paid back in cheaper dollars.
In recent years, however, companies have been adding more and more short-term debt to their balance sheets as erratic interest rates and high inflation have made it harder and harder to sell bonds or get long-term, fixed-rate financing from banks.
The report concedes, however, that while the usual measures of balance sheet well-being may be out of date, there has been a deterioration in financial strength.
The issue is of more than academic consequence. Financially weak companies are more vulnerable to economic downturns. If things get tough, a company can always suspent its stock dividend, but it has a far harder time stopping interest payments on its stocks or bonds. If credit agencies lower a company's rating, it costs the company more money to raise funds, increasing the interest rate burden it must carry, adding to inflation and increasing the prospect that it will not earn enough money to pay the interest and take the other investment steps it must take to stay in business.
If things get tough enough, bankers might stop throwing good money after bad and call in loans. That could lead to corporate bankruptcy, unemployment and, not so incidentally, a weakened position for the banks.