Corporate debt…does it constitute an existential threat?

Corporate debt…does it constitute an existential threat?

Yes, debt poses an existential threat to partnerships, but many successful companies were improving the structure of their liabilities by controlling their share of debt. When successful companies borrowed, they were working to limit the occurrence of revenue shocks and at the same time restrict their debts to the size of the assets they own. By reviewing its ability to sustain debts and monitoring real economic reactions and interactions in the sector to which the company belongs.

Many of the debts of large companies can only be borne in the long term. However, the company’s income to debt ratio cannot be ignored. The impact of debt on growth has always been linked to the issue of the ability to bear debt. This is why the crises of most companies result from exceeding the financial solvency previously determined in terms of debt. Or debt service and revenues as a percentage of the company’s production capacity and its ability to generate future revenues or collateral assets.

What is noteworthy is that the companies that were involved in debts and losses were the result of poor executive management, as they finance the losses and damages in indirect ways. For example, some joint-stock companies reduce and increase their capital. In fact, the loss from these practices represents the burning of the balance of part of the cumulative national capital.

We can describe the problem in other words: the problem of debt sustainability results from a lack of revenues, in addition to the fact that the executive departments do not have plans to reduce their shocks, nor do they have a measure that can be used to evaluate debt levels and their ability to address the problems of shocks when they decrease.

There are optimal limits of debt, which in turn stimulate growth, and they differ according to each sector. For example, the retail sector is characterized by rapid turnover rates, so short debts are appropriate, in contrast to the heavy sectors of petrochemicals that need a mix of debt structure, but according to our rule, the ratio of debt to direct revenues or Indirect and asset size.

Resorting to excessive debt has become one of the techniques of CEOs to achieve short-term results. This explains the growth of debt in joint-stock companies, as the accumulated debt is transferred between successive executive departments. The salary and compensation rates associated with quick successes are attractive to any CEO.

What makes corporate debts accumulate like mountains is the lack of debt policies from boards of directors, thus causing executive leaders to take easy paths to professional success at the expense of the company’s future sustainability and success.

Finally: We realize the magnitude of the variables that affect the sustainable revenues of any company, but when boards of directors do their part and set strict debt policies; It will prevent executive leadership from slipping into excessive debt and from an existential threat that may affect the company and shareholders, and the subsequent loss of financiers and investors’ money, ultimately reducing the total national capital available for business.


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