Rise in Corporate Debts - Essay Example

The continuous increase in corporate debt has direct impacts on the financial health of any given sector and by extension other sectors of an economy. Companies with large amounts of debts are susceptible during economic recessions because their debts cannot be reduced or paid back easily. As a result, such companies are forced to limit their investments significant to their going concern in the markets (Talley 1). This may also call for downsizing of its human resource causing inefficiency in operations in both the short and the long run.

These actions would result in a diminished overall productivity of a company. Moreover, it would also contribute towards an economic downturn as capital goods orders reduce and laid-off workers cut back purchases. When heavily indebted companies succumb to the economic pressures, and the financial crisis persists, bankruptcy sets in. this leads to potentially large losses and costs to creditors, employees and all stakeholders. In addition, the article states that the likely cause of the increase in corporate debt is driven by weak balance sheets owned by several companies.

In addition, weak levels of profitability have prompted firms to borrow in order to sustain their basic operations (Talley 1). According to research conducted by global banking group, the high-yield corporate issuances of loans in Europe increased by 50% as compared to the year 2012. Some of these loans were issued to riskiest terms in relation to their economic operations. These business organizations’ financial health can be measured using leverage, liquidity and their overall solvency. In these corporations, leverage is defined as the ration of a company’s debt to its long-run earnings capacity.

Companies with high debt levels as compared to their ability to earn profitable are vulnerable to the global economic troubles. Liquidity refers to a business organization’s ability to clear its debt obligations relative to their long-term profitability. Low liquidity in a firm leads to difficulties in meeting debt repayment obligations. Solvency indicates the corporate health status of a firm that includes capital, revenue, profitability, leverage and liquidity. These characteristics explain reasons for