Interest payments are eating further into US companies' profits as total debt as a percentage of equity falls.

In the fourth quarter of 2023, earnings before interest and tax was able to cover debt-interest payments 6.78 times for the median investment-grade rated company, according to the latest S&P Global Market Intelligence data. This interest coverage ratio declined from a revised 6.92 a quarter earlier. Companies rated below investment grade by S&P Global Ratings recorded an improvement in their median coverage ratio, with the fourth-quarter figure of 3.09 up from 3.01 in the third quarter of 2023.

Median ratios for investment-grade and noninvestment-grade companies have been on a gradual decline since peaking in the second quarter of 2022, generally coinciding with the US Federal Reserve's initial push to raise its benchmark rate from the pandemic-era near-zero floor.

Higher interest rates have made new borrowing and refinancing existing debt more costly for US companies. While the Fed is likely to cut rates in 2024, the timing and degree of those reductions remain in question.

Sectors

Half of the 10 sectors that Ratings tracks recorded an improvement in their investment-grade median interest coverage ratio. The information technology sector recorded the largest improvement, rising to 12.67 in the fourth quarter of 2023 from 10.84 a quarter earlier.

Consumer discretionary companies recorded the largest drop among investment-grade sectors in their median interest coverage ratios, falling to 8.06 in the fourth quarter from 11.73 a quarter earlier.

Median ratios rose for six of the 10 sectors for companies rated non-investment-grade. Within this group, energy companies recorded the largest improvement, with a median interest coverage ratio rising to 4.96 from 2.62. Materials companies registered the largest fall in median ratio to 2.92 from 4.37.

Debt

Debt is broadly falling as a percentage of total equity for investment- and non-investment-grade companies alike. For the median investment-grade company, total liabilities in the fourth quarter of 2023 were 84.60% of shareholder equity, down from 87.13% a quarter earlier. About half of the 10 sectors tracked by Ratings reported a fall in this figure on a quarter-over-quarter basis.

Non-investment-grade companies reported sharper improvement, with the median debt-to-equity ratio for the group falling to 112.35% in the fourth quarter from 123.30% in the preceding quarter.