When looking for "zombie" companies in the US and their impact on margins and market multiples, it becomes evident that the debt burden of companies has a compounding effect on their financial performance.
Debt Burden and Operating Margins
The operating margin of all US non-financial companies with revenues over $500 million and capitalization over $1 billion is 11.1%. However, it's interesting to note that companies with very high debt loads (between 80% and 100% net debt to revenue) have the highest margins (25.2%), while companies with ultra-high debt loads (over 100%) still maintain margins (15%) above the national average (11.1%).
Interestingly, companies with a low debt load (0 - 0% net debt to revenue) exhibit the lowest profitability at 7.5%. Similarly, companies with a low debt load (20 - 40%) generate a margin of only 8.3%, while companies with an average debt load (40 - 60%) achieve a margin of 9.9%.
Therefore, we can conclude that the higher the company's debt, the higher its margin, except for the extreme values (negative debt load and critical). This conclusion may seem absurd, but these are the realities.
Notably, companies with ultra-high-debt loads have a net debt-to-free cash flow (FCF) ratio of 3721%, requiring 38 years to pay off debt without even spending a single dollar on dividends and share repurchases. On the other hand, companies with low debt loads (0 - 20%) take only 1.7 years to fully pay off debt, while all non-financial companies, on average, take 3.8 years to fully pay off debt.
High-Leverage Businesses
Interestingly, the valuation of a business does not always correlate with its level of debt. For example, a company with a critical debt load has a P/S of 2.3, and a company with a very high debt load has a P/S of 2.6, while a business with minimal debt is valued at only 1.1.
Businesses with leverage above 60% (net debt to revenue) have the following ratios: operating margin 16.8% (national level 11.1%), net margin 9.5% (8.1%), FCF to revenue 9% (8.3%), P/S 2.32 (2.2), P/E 24.3 (27.3), P/OCF 9.8 (15.2), P/FCF 25.6 (26.4), according to your calculations based on company reports.
Thus, companies with high leverage have a positive impact on margins and have comparable market valuation multiples compared to the nationwide level.
The sample includes nearly 1,300 non-financial companies in the United States. Therefore, companies with leverage greater than 60% represent a significant portion of the market, and their characteristics are worth considering in the context of company analysis and valuation.
Zombie Companies: The Utilities Sector
In addition, in the context of your study, "zombie" companies such as the utilities sector, with negative FCF due to capital expenditures and huge debt, are of particular interest. The communication services sector also carries a significant debt burden with long repayment periods.
Conclusion
In conclusion, high-debt companies surprisingly showed higher operating margins, and high-leverage businesses maintained competitive market valuations. The utilities and communication services sectors, with significant debt burdens, are of particular interest. Understanding debt's impact is crucial for comprehensive company analysis and valuation.