Depending on how you look at it, corporate debt levels may look dangerously high or managebly low.
In a note to clients on Monday, Morgan Stanley's Adam Parker takes the latter view.
He highlights two key features of this debt corporates have taken on: interests costs are much lower than operating profits and the bulk of the debt isn't due for a few years.
He addresses the first feature by pointing out that the interest coverage ratio for companies is near multi-decade highs.
A company's interest coverage ratio is its earnings before interest and tax, or EBIT, divided by its interest expense over the same period. An interest coverage ratio below 1 means companies aren't generating enough cash to service their debt; that ratio is currently around 8.
Basically, profits really have to collapse before corporation start defaulting on their debts.
This chart from Morgan Stanley shows the interest coverage ratio for the largest 1,500 companies in the market through the first quarter of this year.
And not only are companies more than capable of meeting their current debt obligations, this debt also isn't coming due for several years. In other words, companies don't have to worry about refinancing their debts for a little while.
It's also worth noting that these maturities have been pushed back because corporations have been taking advantage of unusually low borrowing costs.
Parker says that the market doesn't appear to be at the top of a cycle, writing that, "Our view is that hubris and debt define the top of every cycle, and as such, we monitor signs that could ultimately translate into more downside to corporate earnings. Today, it is very hard to make that argument."
"Our judgement is that the risk-reward is now skewed more toward the positive than it was early in July," he said.