Should Investors Be Worried About UK Debt Levels?
Low interest rates are something we have come to expect in the UK such is the length of time the bank of England has kept them at 0.5%. Various macroeconomic factors have conspired to keep them that way.
Falling energy prices and the need to keep the economy growing are just two of the factors weighing down interest rates but investors cannot expect the current situation to last for ever if they want to avoid investing in companies that have taken on more debt than they can handle in a downturn.
Sooner rather than later, The Bank of England will decide to tighten monetary policy. If inflation begins to show signs of rising and GDP remains in positive territory, then loan repayments are likely to rise with them not just for businesses, but also the consumers they rely on.
This raises the prospect that investors may be caught out when investing in companies that cannot make their debt repayments leading to an increase in debt recovery proceedings. Corporate debt in the UK as a proportion of output is rising therefore it may be time for investors to take things more seriously and take a closer look at balance sheets.
It can be difficult to find a growing company with little to no debt on its balance sheet but making sure that the debt is manageable and or the company has enough cash reserves to get through a downturn is vital.