Friday, July 9, 2010

S&P 500 Companies: Cash Versus Debt Growth Tells a Very Different Story; Risk Much Higher Today

Standards and Poors has issued an eye-opening report about the state of the S&P500 companies in terms of cash and debt. While the financial media reports that companies are sitting on record levels of cash, the real question is how much debt they have and how do we fare today compared with historical levels, let's say the fairy tale levels of 2006 when everything was so good (we know now it was all fake).

S&P 500 companies have approximately $1T in cash. However, they also have approximately $2.7T in debt. So is that cash really cash, or... debt? Is that a good thing or a bad thing? Clearly it is not a good thing. One of the worst mistakes someone can make is acquire cash via debt. Normally debt accrues higher interest than cash.

Furthermore, from 2006 cash went up about $300B, debt went up about $600B.

Historical levels of cash:

Historical levels of debt:

Cash as percentage of debt:

Please compare 2006, when everyone thought things were great, with today:

While this level of "cash" is portrayed as a good thing, For conservative investors, the current risk levels are much higher today than in 2006.

Investor beware.

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