The chart above illustrates the net debt of the companies in the S&P 500 and the US Treasury 10-year yield. The net debt of these companies has been steadily climbing in recent years and now stands just north of $3 trillion. This sounds like a huge number, and it does represent a nominal increase of 250% since the end of 1999. However, the cost of debt, which is fundamentally influenced by the 10-year Treasury yield, has been falling significantly. In many cases this has caused companies to alter their optimal capital mix. When borrowing is cheap, many would argue that companies have a duty to take advantage of the lower cost of debt capital afforded to them in these situations.
The important question is can this debt be serviced? The chart below illustrates the ratio of free cash flow (FCF) to total debt for S&P 500 companies. While the nominal amount of debt has been rising, the chart shows that the ratio of cash flow to debt has actually improved between 1999 and the present. While the ratio has fallen since the end of the financial crisis, it is difficult to say that there is anything untoward about the debt level currently being taken by large US companies.