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The strong corporate balance sheets of companies in the current cycle lay the foundation for the market recovery, says a report by DSP AMC.
The report stated that the companies have often relied on excessive debt to fuel their growth, sometimes pushing their balance sheets to risky levels. In many market cycles, this over-reliance on borrowings has led to financial instability, making businesses vulnerable to downturns. However, the situation seems different in the current cycle. It said, "In the current cycle, however, balance sheet leverage has remained relatively controlled, with net debt levels not rising significantly unlike previous cycles". The report also added that after the COVID-19 pandemic, many businesses saw strong growth for the first time in years. This growth helped companies expand and, in turn, boosted stock prices. Investors became optimistic, believing that as long as a company showed some potential, its valuation could be justified. Unlike in the past, corporate debt levels have remained under control this time. Companies are not taking on excessive loans, making their financial position stronger. A key measure of financial stability, the Median Total Debt to Total Assets ratio, has been declining. This ratio shows how much of a company's assets are funded by debt. A lower ratio means businesses are relying less on borrowing and more on their profits and reserves for expansion. The report said, "This suggests that companies are increasingly funding their expansion through internal reserves and profits rather than relying on debt, reflecting a more sustainable approach to growth". This shift to self-funded growth suggests a more sustainable approach to business. When companies depend less on debt, they are better prepared to handle economic challenges. It also makes them more attractive to investors who prefer financially stable companies. With businesses maintaining strong balance sheets and managing their debt wisely, the market is in a better position for recovery. If this trend continues, it could lead to a more stable and resilient economy in the long run. (ANI)
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