Market Overview

The Impact Business Debt Has On Investor, Consumer Confidence

The Impact Business Debt Has On Investor, Consumer Confidence

Many factors impact consumer and investor confidence: trade agreements, competition, localized economics, interest rate stability and more.

Debts held by a business will also directly impact the confidence interested parties — particularly investors — have when determining their level of participation in any given market.

Recent examples would include the successful attempt by General Electric Co (NYSE: GE) to strengthen its financial position and improve investor confidence by divesting its interests in the Baker Hughes A GE Co (NYSE: BHGE) oil and gas venture.

Business Considerations

Consumer confidence can also be impacted by business debt.

Businesses face additional challenges when it comes to their consumer base. These include factors such as local business conditions, both current and projected; the jobs market and employment conditions; as well as mean family incomes, both present and future.

For businesses, managing and balancing consumer expectations and perceptions is as important as managing debt and investor perceptions.

Companies, whether public or small business enterprises, almost always borrow money at some point in order to capitalize new ventures and manage cash flow.

The subsequent loan repayments are based on interest rates that put the business at the mercy of the Federal Reserve.

By determining the Fed Funds rate, the Reserve directly impacts variable and short-term interest rates for companies. Maintaining a low debt position in relation to these loans can improve a company's brand perception and improve its stock growth.

As reported by JAG Capital Management in February 2018, low-debt growth stocks have annualized 17.1% returns over the past 23 years versus 7.5% for their high-debt peers.

Since 1995, companies with stable or minimal growth in debt have tended to enjoy stronger returns when compared to organizations carrying top debt loads.

Stocks that maintain a low debt policy have typically proved much better than high-debt stocks, with EPS growth at 11% for companies with higher levels of debt as compared to businesses with low or lighter debt that have enjoyed 16% EPS growth.

Eyes On The Prize

Companies wanting to improve consumer confidence and investor enthusiasm in relation to their debt need to keep the following issues in mind:

  • Financial transparency.
  • Continuing product and service innovation.
  • Maintaining a low debt threshold.
  • Brand and public relations management.
  • The impact of economic and political transitions.
  • Ensure that the focus on development and growth is clear and concise.

Every company has, at some point, experienced the threat of debt overload. Combined with periods of consumer disinterest and investor hesitation, companies can lose a lot of ground quickly.

At these times, investor relationships become critical in maintaining market position and in rebuilding momentum.

Debt management presents businesses with both a challenging test and an opportunity to improve investor and consumer confidence in a company's leadership and long-term viability.

Structuring a policy that helps ensure low debt levels and that continually examines historical trends, current market data and future expectations should be the daily work on the ground for a corporation.

These strategies will help ensure the highest level of consumer and investor participation in a brand.


Related Articles (GE + BHGE)

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