Corporate Debt:33% find it difficult to repay

Ask anyone how they would avoid investing in a leveraged company. Chances are that nine times out of ten, you would be advised to look at the company's debt to equity ratio. If it is within safety limits, the firm can be considered as a good candidate for investing. What doesn't get analysed often is the issue of liquidity. For if the company has built long term assets with relatively shorter term funding, there is a risk that the company may run into cash flow problems if the old debt is not refinanced. Alternatively, if the assets don't start generating revenues soon enough, even then the company could run into trouble. 

The Economic Times reports how it is this latter issue that is giving lenders and borrowers sleepless nights these days. Sample this. As on September 2013, listed companies had total borrowings to the tune of Rs 24 trillion. And out of this, a whopping one third was with companies where interest costs exceeded the operating profits earned during the quarter! And the problem, as highlighted earlier, is not that of solvency but mostly of liquidity. In other words, thirty year assets were built with 10-year money with the borrower expecting money from the eighth year onwards. Well, the indebted companies will have to quickly offload other assets or somehow find new sources of funding to replace old debt. If not, we could well be staring at a crisis of huge proportions.