Companies with small market capitalization’s, so-called “small caps”, have traditionally acted as a “canary in the coal mine” for the larger market since they tend to be more domestically focused and more sensitive to growth worries than their larger cap counterparts. Given that, Andrew Lapthorne, analyst at Societe Generale, is concerned that small cap companies have been taking on a massive amount of debt over the last few years, far outstripping their earnings growth (EBITDA on the chart below) and greatly increasing their balance sheet leverage. Lapthorne notes, “If you have leverage and your share price is weak, that compounds the problem.” And a small company with balance-sheet problems can’t do what the big boys do — raise money by going back to the markets with bond issues, he notes.
The Build-up of US SmallCap Debt is Significant
| January 21, 2019