If you spend your day listening to mainstream financial media you could be forgiven for believing that things have never been better for corporate balance sheets - exceptionally high levels of cash and fortress-like conservatism for example. However, in the trenches of reality, from a high-yield and investment grade credit market perspective (and perhaps this is why credit markets are expressing considerably more concern than equities still) there are three trends that point to deterioration and far-from-Nirvana cash-flow protection that should be paid close attention to.
1) Leverage has stopped falling and in fact has started to tick higher
2) Cash/Debt is trending down rapidly and is far less supportive than it was (once again focusing on justthe cash- asset side of the balance sheet misses the fact that firms have raised debt at cheap levels too - this is clear in this chart. There remains corporate conservatism but it is far less supportive of cyclical low spreads now than at any time since the crisis began).
3) Margin Improvement is no longer broad-based (as we noted recently, costs are increasing faster than revenues which compresses margins rapidly and in the worst case chews throiugh that stickpile of cash - hence the other two charts).
Perhaps this weakening trend in fundamentals - as cash-flow is king - is why credit markets have been sounding some warnings for a month...
Charts: Morgan Stanley