We often hear about wasteful spending and investment in China. We also hear this is not going to end well.
Now the Australian investment bank Macquarie is showing us what this looks like in practice. The analysts looked at the bonds issued by 780 companies and $3.47 trillion in debt (a fairly comprehensive sample size) and how these companies are managing interest payments.
The answers to these questions aren’t too pretty.
Like any private person (and very much unlike governments) private corporations have to use their income to pay for interest expense on borrowing.
Eventually, they will also have to use their income to pay back the debt. If they are able to cover their interest and pay back the debt without creating losses, the investment for which the debt was used can be considered successful.
Macquarie said that more than 20 percent of the companies it analyzed cannot cover their interest expenses with just their income from normal operations (earnings before interest and taxes or EBIT) or in finance terms are “EBIT uncovered.”
This means their total interest expense for one year is higher than one year’s operating profit. In other words, they have to borrow more money or raise equity to pay the bills. Or default. Most of them are in the mining, materials, and infrastructure business.
“More than half of the cumulative debt in this sector was EBIT uncovered in 2014, and all sub-sectors have their share in the uncovered part, particularly for base metals, coal, and steel.”
