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January 05, 2007

Are businesses overextended too?

We worry about households being overextended with debt. N.C. State University economist Mike Walden considers whether the same worry applies to businesses.

"Well, you might think so … because like households, businesses today have a record amount of debt if you just look at it in dollar terms. And so you could conclude that, yes, like households businesses are also overextended," says Dr. Walden, an economist with the College of Agriculture and Life Sciences.

"But you have to remember that businesses also have a lot of value. We call that equity in financial lingo. So what most economists would recommend you do is you don’t just look at the dollar amount of debt, you look at the debt a business has compared to its equity or value," he adds. "You look at those ratios, and when we do this we actually see that debt relative to equity for the average business is relatively low. It’s about 50 percent.

"It’s actually half of what it was throughout most of the 1990s. So the conclusion here is that in aggregate businesses are not overextended with respect to their debt."

Posted by deeshore at January 5, 2007 08:00 AM

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