Coca Cola, which in my opinion makes the best soda drink ever (sprite), is an interesting company. If you look on their balance sheet for 2009 it shows that they have over 20 billion dollars in debt. This is nearly half of their total assets. Why on earth would Coca Cola ever take on so much debt? Isn’t that risky? And if Coca Cola can do it, couldn’t the U.S. government?
The reason that Coca Cola takes on such a heavy load of debt is because of what is called a sustainable growth rate. Almost all businesses are very highly leveraged with debt financing. When a business starts out they don’t have enough money to finance the growth. In order to continue growing, the business must incur debt to continue its growth, allowing it to buy more assets, i.e. property, plant and equipment. By taking on debt these companies are then able to sell more goods and in the end make more money.
As businesses take on more debt they also incur more risk. The risk being that they won’t make enough money to be able to service their debt. In other words, they won’t be able to make the interest payments on the debt. This is a very real risk shown in the fact that only 44% of new businesses make it past the first 4 years. It’s not just small businesses that are exposed to the risk of debt but big businesses too, such as General Motors and others who have only been sustained through government stimulus money.
The brunt of my argument is this: Can the United States afford the added risk with high levels of debt? Will we be able to continue servicing our debt at the rate it is growing; if not who will bail out the U.S. government when they go bankrupt? A final question: is the ultimate goal of our government to continue to grow?
Josh Oaks