The 6 Most Indebted Companies in the World and Why It’s Not Always a Problem

A healthy balance sheet and balanced accounts are usually the objective of any economic actor: a State, a company or even a family.

Being in too much debt is, after all, a way to jeopardize the health of your finances.

However, there are companies and large conglomerates that need to borrow frequently in order to continue with their business.

This is especially the case for capital-intensive companies (which need a large volume of money for their operation), such as oil companies, which do dozens of explorations before finding crude oil underground. They have to invest a lot.

Or car brands constantly innovating to make better engines or safer cars.

Others, like pharmaceutical companies, invest years to develop new drugs.

If we look at the case of Netflix, before being able to fill its streaming platform with series and movies, it has to pay actors, producers, screenwriters…

“Netflix has continued to increase its loans to finance content creation, although its balance sheet is much healthier today than in the past, as evidenced by credit ratings,” says a study by Janus Henderson Investors.

And for all that, money is needed. A lot of money.

It is no coincidence that the 10 most indebted companies in the world, according to the Janus Henderson report, belong to sectors where a lot of research is needed, where innovation is fundamental or competition is fierce.

In the first positions of the ranking are the automotive companies Toyota and Volkswagen, with net debt in 2021 of US$ 186 billion and US$ 185 billion, respectively.

They are followed by three telecom providers: AT&T, Verizon and Germany’s Deutsche Telekom, with $182 billion, $174 billion and $153 billion in debt each.

For comparison, these figures are similar to those for Norway’s entire public debt in 2021 (US$176 billion) or Colombia’s (US$171 billion) in the same year.

Corporate debt in Latin America

In sixth place is another well-known car brand: Mercedes-Benz, which had $109 billion in outstanding debt on its balance sheet last year.

If we look at countries, companies in Mexico are accumulating US$ 36 billion in debt, while those in Colombia owed around US$ 20 billion as of June this year.

Chile’s, US$ 12 billion.

“Emerging market companies owe relatively little, reflecting more volatile economic conditions,” say Janus Henderson analysts Seth Meyer and Tom Ross.

But while debt always indicates a company’s financial health, having too much is not necessarily a negative thing.

There are industry sectors like car manufacturers or telecom companies that need a lot of capital to function.

“Companies need to borrow money because they have the need to grow in many sectors. Investment always requires financing, which can be via more capital, money from partners or loans”, comments Pedro Aznar, professor at the Department of Economics, Finance and Accounting at the ESADE Business School in Spain.

For the professor, indebtedness is a good option as long as the expected return on investment exceeds the cost of debt, something that has been common in some sectors, with lower interest rates.

So is it bad to have a lot of debt?

It all depends, experts say, on the balance between the value of what a company owns and what it owes.

“It’s a relative issue. Debt can be placed in relation to the company’s total assets, the value of everything it has. If a company has assets that can lose value, or are volatile in value, debt is a risk.” Aznar tells BBC News Mundo, the BBC’s Spanish-language news service.

“But if a company has assets with safe value that support its debt, a certain degree of indebtedness is not negative: on the contrary, it allows it to grow and also increase profitability”, he adds.

And as these numbers are from the last fiscal year, it is likely that, in the new economic context, companies will start to be more conservative in the way they finance themselves.

If profits fall, repaying loans can be more complicated.

And an increase in interest rates — as we have seen in these months — also affects, as debt interest rates rise and this harms results.

“Having to pay interest and principal at maturity makes debt riskier than equity as a source of financing for the company,” says Pierre Verlé, head of corporate debt at investment firm Carmignac.

“Slower global economic growth, including recessions in some parts of the world, is making companies more cautious,” estimate Meyer and Ross.

This text was originally published here.