Interest eats further into corporate profits in Q1 2024

Interest payments are consuming a larger share of US corporate earnings as benchmark rates remain higher for longer.

During the first quarter, earnings before interest and tax was able to cover debt-interest payments 5.78 times for the median investment-grade US company, according to the latest S&P Global Market Intelligence data. This interest coverage ratio fell from a revised 6.08 ratio in the fourth quarter of 2023, marking the second straight quarter of declines for companies rated BBB- and above by S&P Global Ratings.

Companies with non-investment-grade ratings reported a fourth consecutive quarter of a falling median interest coverage ratio. The first-quarter ratio of 2.62 is a decline from 2.89 in the fourth quarter of 2023.

Businesses are grappling with higher borrowing costs as the US Federal Reserve holds the federal funds rate at its recent peak. Monetary policymakers are expected to lower rates slightly this year, offering some relief.

Sectors

Six of the 10 sectors tracked by Ratings recorded an improvement in the median investment-grade interest coverage ratio.

The consumer discretionary sector reported the largest gain, with median earnings covering interest payments 10.40 times over, up from 8.08 a quarter earlier.

Among investment-grade companies, declines came in the IT, energy, consumer staple and real estate sectors.

Non-investment-grade companies fared worse.

Eight out of 10 sectors in this category reported falling median interest coverage ratios, with consumer staples and communication services reporting a slight improvement.

Debt

Total debt as a percentage of equity declined for rated companies during the first quarter.

Median debt-to-equity ratios for investment-grade companies fell to 87.05% from 88.90% in the fourth quarter of 2023, while the same ratio for non-investment-grade companies dropped to 118.8% from 121.6% a quarter earlier.

Among investment-grade companies, median debt-to-equity ratios grew for six out of 10 sectors. Declines came for communication service, industrial, consumer staple and utility companies.

The split was even for non-investment-grade companies, with declines in the material, consumer discretionary, communication service, industrial and utility sectors.