1 Data

In this reproducible report, I use my capital structure database to compile a comprehensive overview of the global corporate landscape, including the price of risk, costs of capital, quality of investments, indebtedness, and payouts in terms of dividends and stock buybacks. Readers can download the data used for US companies, broken down by industry, by clicking here, and they can also download the data for other geographies here: Europe, Emerging Markets (China and India), Australia, NZ & Canada, Japan & Global. All companies with non-zero market capitalization were included yielding a total of 47810 firms on January 1, 2025. While these companies are incorporated in 132 countries, they were classified broadly in to 12 geographical groups and 94 industry groups built on raw service industrial grouping and SIC codes. In computing cost of capital and excess returns, I deliberately removed financial services firms from the analysis, because: (i) computing operating income or invested capital is a difficult, if not impossible task, at these firms. (ii) debt to a financial service firm is more raw material than capital, and determining what comprises debt is almost an unsolvable puzzle. In sum, I hope you find this report useful.

2 Price of Risk

In a world where both investing and business is globalized, we need equity risk premiums for markets around the world, not only to value companies listed in those markets, but also to value companies that have operations in those countries. Investing or operating in some countries will expose investors to more risk than in other countries, and the cost of capital (hurdle rates) they use should reflect that additional risk. While there are some who are resistant to this proposition and argue that country risk can be diversified by having a global portfolio, that argument is undercut by rising correlations across markets. Consequently, the question becomes not whether investors should incorporate country risk, but how best to do it. There are three broad choices:

The vast majority of countries have sovereign ratings measuring their default risk. Since these ratings have corresponding default spreads, we can use these default spreads as measures of country risk.
The credit default swap market is where we can buy insurance against sovereign default, and it offers a market-based estimate of sovereign risk. While the coverage is less than what we get from sovereign ratings (158), the number of countries where you can obtain these spreads has increased over time to reach 1 in 2025.
While we can use the country default spreads as proxies for additional equity risk in countries, we can also use the ratio of volatility in an emerging market equity index to an emerging market bond index to estimate the added risk premium for countries.

Below, we estimate the risk premia by country¹ with the intent to incorporate these numbers into our cost of capital calculations.

2.1 Default Spreads & Risk Premia

Here, we start with the implied equity risk premia that we estimated for the $US$, 4.33% on January 01, 2025 and add them to the country risk premium for each country. The full adjustment process is described below:

Estimate the business risk in the company by taking a weighted average of the risks of the businesses that the company operates.
Adjust that risk measure for the effects of debt which effectively magnifies the business risk exposure. Use the consolidated risk measure to estimate a cost of equity.
Bring in the cost of borrowing, net of any tax benefit, which will reflect the default risk in the company. Finally, taking a weighted average of the cost of equity and after-tax cost of debt yields a cost of capital.

3 Corporate Taxes

There are three realities that cannot be avoided in business and investing. The first is that returns and value are based upon the cash flows companies have left over after they pay taxes. The second is that the taxes they pay are a function of both the tax code of the country or countries that they operate in and how they, as a business, work within (or outside) that code. The third is that the tax code itself can change over time, as countries institute changes in both rates and rules. This is worth emphasizing, because the change in the US corporate tax rate in $2017$, from $35\%$ to 21.95%, accompanied by the abandonment of the global tax model just brought the US closer to the rest of the world in terms of both tax rates and treatment of foreign income.

3.1 Marginal Tax Rates

Governments set corporate tax rates, but companies use the tax code to full advantage to try to minimize taxes paid and delay the payment of taxes. In fact, at the start of 2025, the picture below summarizes corporate tax rates around the world:

Note that the marginal tax rate for $US$ companies is close to 25%, with state and local taxes added on, and is roughly equal to the average tax rates in almost every region of the world. The marginal tax rate is the number used to compute the after-tax cost of debt but that practice is built on the presumption that all interest expenses are tax deductible (and that there is enough taxable income to cover the interest deduction). That is still true in much of the world but there are parts of the world, where companies cannot deduct interest expenses (such as the Middle East) or have taxes computed on a line item like revenues (thus nullifying the tax benefit of debt), where we will have to alter the practice of giving debt a tax benefit. For multinational companies that face different marginal tax rates in different operating countries, it is better to use the highest marginal tax rates across countries, since that is where these companies will direct their borrowing.

3.2 Effective Tax rates

If the marginal tax rate is the tax rate on the last dollar of income, what is the effective tax rate? The effective tax rate measures the actual taxes paid, relative to taxable income, and it is the number that determines how much governments collect as tax revenues. In most cases, it is a computed tax rate that is reported in financial statements (income statement) and is computed as follows:

\[\text{Effective Tax Rate = (Accrual) Taxes Payable / (Accrual) Taxable Income}\] Both numbers are accrual income numbers and thus can be different from cash taxes paid, with the differences usually visible in the statement of cash flows.

Let’s start with looking at what companies pay as effective tax rates in the United States, a country with a marginal tax rate of 25%. In the most recent twelve months leading into January 2025, the distribution of effective tax rates paid by tax-paying US companies is captured below.

If the end game is to get companies to pay more in taxes, removing tax deductions and credits will be more effective than increasing the tax rate. In fact, raising the tax rate will not only raise the effective tax rate paid by companies far less than expected, but it will also have disparate effects across companies, with sectors (like retail) that have fewer degrees of freedom, when it comes to changing taxable income or deferring taxes, bearing the brunt of the pain.

3.2.1 Sector-specific Tax Behavior

3.2.2 International Tax Behavior

To wrap up, the values of all companies in a country can change, some in positive and some in negative ways, when tax codes get rewritten. Even if the corporate tax codes don’t change, a company’s decisions on how to structure itself and where geographically to go for growth will affect its cash flows and discount rates in future years. Changes to the tax law that are temporary or come with sunset provisions create uncertainty for businesses trying to make investment decisions for the long term. In fact, changes in tax law take a while to work their way into corporate behavior. One of the better features of the US $2017$ tax act was that it had provisions designed to make debt financing less attractive, relative to equity, but we will not get a chance to see if companies become less dependent on debt, if tax rates are hiked and/or the limitations on interest tax deductions are eliminated.

4 Cost of Capital

Every major crisis creates changes in business environment, regulations and business models that reshapes the economy and resets competitive games, setting the stage for new winners and losers. Thus, for some companies, the bad news on revenues and earnings this year may be a precursor to superior operating performance in the post-pandemic economy, as their competition fades. Heading into a post-pandemic economy, there will be wrenching changes in most sectors globally, and complications for the ‘Chief Figure-it-out Officers’ (CFOs) lie in two aspects. First, in the statistical problems with estimating risk parameters, and second, with the financial models they build on these parameters. While the discussion of cost of capital is often obscured by debates about risk and return models, it is a number central to much of what we do in corporate finance and valuation. We cannot run a business without a sense of what we need to make on our investments to break even, and we cannot value a business without a measure of our opportunity cost.

In corporate finance, it is the hurdle rate for investments. Essentially, riskier investments have to meet a higher return threshold.
In capital structure, the cost of capital becomes an optimizing tool that helps us decide the right mix of debt and equity.
In dividend policy, the cost of capital becomes the divining rod for whether companies should be returning more or less cash to stockholders. If they operate in a business where the returns on new investments consistently fall short of the cost of capital, they should be returning more cash to investors.
In valuation, the cost of capital is the discount rate that we use to bring operating cash flows back to today to arrive at a value for a business. It has, unfortunately, also become the instrument that analysts use to bring their hopes, fears, and worries into value.

In short, it is difficult to do financial analysis without at least getting a sense of what the cost of capital is for a business. The many uses to which it is put has also meant that it has become all things to all people, a number that is misused, misestimated, and misunderstood. Companies often use one cost of capital to assess investments with different risk profiles, acting on the presumption that the cost of capital is the cost of raising capital, rather than a risk-adjusted required return for investing in a risky asset. Investors use the cost of capital as a dumping ground for all their fears about investments by augmenting the standard risk-adjusted discount rate with premia for liquidity, small market capitalization, and opacity. We can definitely do better.

Starting with the 42717 non-financial service companies that we have in our global database at the start of 2025, we estimated the cost of capital for each company and then looked at the average costs of capital by sector. We also computed the cost of capital differences across global regions. Note that the differences are not rooted in currency, since the cost of capital for every firm is computed in US dollars ². As to why costs of capital vary across countries, the answer can be traced back to two factors. The first is that debt ratios vary across the world. The second is that the regions of the world with higher sovereign default spreads and equity risk premia will have higher costs of capital than regions that have less risk. The analysis below summarizes the differences.

4.1 Global Distribution

Let’s start off with the US-Global distribution of costs of capital, where we compute the cost of capital for each of the 42717 non-financial service companies in the database.

Use the distribution of costs of capital in this graph, as the basis, for estimating a cost of capital for stocks:

9.53% (US) and 10.64% (Global) as the cost of capital for risky firms.
8.67% (US) and 9.36% (Global) as the cost of capital for mature firms.
7.79% (US) and 8.48% (Global) as the cost of capital for safe firms.

The table below summarizes the cost of capital differences across global regions.

These are all in $US$ dollars, but you can use the differential inflation approach to convert them into other currencies.

4.2 Sector Differences

Starting with the 42717 firms that we have in our global database at the start of 2025, we estimated the cost of capital for each company in dollar terms and then looked at the costs of capital by sector.

Below is the entire sector list for cost of capital.

If we have to estimate the cost of capital for a sector or a company in that sector in $US$ dollar terms, we could use this table as a proxy. Again, adding the inflation differential will give us the cost of capital in any other currency.

5 Excess Returns

We have looked at the costs of capital for companies across industries and regions. We have argued that these hurdle rates represent benchmarks that companies have to beat to create value. That said, many companies measure success using lower thresholds, with some arguing that making money (having positive profits) is good enough and others positing that being more profitable than competitors in the same business makes a firm a good company. However, without considerations given to cost of capital, returns are only half the picture. After all, capital is invested in businesses and that capital invested elsewhere in equivalent risk investments could have earned a return. The composite measure of excess returns is what we estimate here.

5.1 Growth Rates

In an age where scaling up and growth seem to have won over building business models and profitability as the most desirable business traits, it is worth stating the obvious. The measure of a good business is its capacity to generate not just profits, but also to convert these profits into cash flows that investors can collect. In this section, we look at growth, earnings, and cash flows, and how they interact in value. We use this framework to examine how companies around the world, in different sectors, measure up.

Transparency with estimation choices are especially important when it comes to growth. For historical growth rates computed at the start of 2025, we use the compounded average growth rate in the previous five financial years. For most firms in the sample, this is the geometric average growth rate from 2019 as the base year to 2024 as the final year in the sample. We also compute growth rates in revenues (top line) and net income (the proverbial bottom line). With the latter, growth rates are not computed for companies that are money losing since the growth rate becomes a meaningless number. With that lead-in, we start by estimating growth rates by industry group. In the table below, we list the ten industries with the highest growth rate in revenues in the last $5$ years and the ten with the lowest:

industries with the lowest growth rate in revenues in the last 5 years

industries with the highest growth rate in revenues in the last 5 years

To see if there are differences in growth in different parts of the world, we then break down growth rates in revenues and net income by countries.

Finally, it is worth noting that investing is based upon future growth, not past growth, and I use estimates of expected growth rate in earnings per share as my proxy. Notwithstanding the biases that analysts bring into this estimation process, it remains a forward-looking number. We look at how expected growth in earnings per share varies across companies in different $PE$ ratio classes:

While this data is too raw to draw big conclusions from, higher $PE$ stocks have, not surprisingly, higher expected growth rates than low $PE$ stocks. As investors though, that tells you little about whether high $PE$ stocks are good, bad, or neutral investments. The enduring questions are whether (a) the high expected growth reflects reality or hopeful thinking on the part of analysts and (b) the $PE$ ratio fully, under, or over reflects this expected growth rate. It is one reason that we remain wary of using pricing screens to pick stocks since there is no short cut or formula that will answer this question. That will require a deep dive into the company’s business model and a full forecasting of earnings, cash flows, and risk, i.e., an intrinsic valuation.

5.2 Profitability

Growth is only one part of the valuation puzzle since without profits that come with it, it will be wasted. In this section, we look at profitability across countries, sectors, and subsets of stocks, again with the intent of eking out lessons that we can apply in corporate finance, investing and valuation.

Let’s start by looking at margins across industries to get a rough measure of how revenues flow through as earnings to the firm and its equity investors. In the table below, we list the ten industry groups with the highest and lowest operating margins, using global companies:

industries with the lowest operating margins

industries with the highest operating margins

Looking across regions, we compute profitability measures across all companies in each region while recognizing that the industries that dominate each region are very different.

5.3 Reinvestment

If revenue growth captures the scaling up factor and margins the profitability of a business, the last part of the story has to be about the efficiency with which the growth is delivered. For manufacturing companies, this will be captured in how much they spend in adding production capacity and how efficiently they use this added capacity to produce more units. For non-manufacturing companies, the investment may be in research and development, acquisitions, and other “intangibles”, but it too is reinvestment and its payoff in growth that affects value. For retail firms, it may take the form of inventory, accounts receivable, and other ingredients of working capital, and how well they can manage these as they grow.

In this section, we report on investment efficiency numbers, staying true to my premise that reinvestment has to include acquisitions and $R\&D$. To get a sense of how investment efficiency varies across industries, we computed sales to invested capital and returns on capital across industry groups. In the table below, we report on the ten most and ten least efficient industries, at least when it comes to delivering revenues for every dollar of capital invested.

least efficient industries: revenues for every dollar of capital invested

most efficient industries: revenues for every dollar of capital invested

Looking at regional differences, again recognizing that the industry concentrations vary geographically, we find the following:

5.4 Excess Returns

With the caveat in mind that the returns on capital that we compute for individual companies reflects operating income in 2024 that clearly will change, we compare the return on capital to the cost of capital for each of the 42717 non-financial service companies in the sample and used that comparison to create a global distribution of excess returns:

As 60.59% of global companies generated returns on capital that were lower than their costs of capital by 2% or more, and 27.07% of global companies earned returns that exceeded their costs of capital by 2% or more; 12.33% of companies earned returns that were within 2% of their costs of capital.

To complete the assessment, we looked at excess returns generated by industry and created a listing of the five industry groups with the most positive and the five with most negative median excess returns:

most negative median excess returns

most positive median excess returns

5.5 Lessons learned

It is quite clear that center of gravity has shifted for both economies and markets, with the bulk of the value in markets coming from companies that are very different from the companies that dominated the twentieth century. While much is made of the fact that the biggest companies of today’s markets (in market capitalization terms) derive their value from intangible assets, I think the bigger difference is that these companies are also less capital intensive and more flexible. That flexibility, allowing them to take advantage of opportunities quickly, and scale down rapidly in the face of threats, limits downside and increases upside. There is more optionality in the biggest companies of today, making risk more an ally than an enemy for investors, and with options, risk can sometimes be more ally than enemy.

6 Debt burdens

In Ernest Hemingway’s “The Sun Also Rises”, someone asks Mike Campbell, the troubled Scottish war veteran who is engaged to Lady Brett Ashley, how he ended up bankrupt. “Two ways,” Campbell replies. “Gradually, and then suddenly.” Campbell’s interlocutor goes on to ask what brought about his collapse. “Friends,” Campbell says. “I had a lot of friends. False friends. Then I had creditors, too. Probably had more creditors than anybody in England.”

It is too early to determine whether a large number of companies that currently rank among the “Zombie Companies” might be headed for the same fate as the wretched Campbell, but there are intriguing parallels. The $COVID-19$, for example, was responsible for a trifecta of the most pressing economic problems: stagnant revenues, the drop in earnings and the rise in debt on balance sheets. The cash flows that we observe for a business can be captured by the interactions between these three forces, and those interactions let us differentiate between companies best suited to not just survive, but emerge stronger in the post-pandemic economy. Stronger firms pull off the trifecta, scaling up revenues with relatively little debt and reinvestment, while delivering positive margins. “Zombie” companies are saddled with the worst possible mix of slow revenue growth, negative margins and very large amount of debt. Unique and unfair access to cheap debt and unlimited liquidity distort the natural lifespans of “Zombie” companies.

To evaluate whether the previous arguments were justified, we look at the degree of indebtedness of companies around the world to assess (i) how much danger they are exposed to right now and (ii) which industries and countries are best positioned to make it through this crisis.

6.1 Interest Bearing Debt & Lease Commitments

We begin by looking at debt burdens relative to both book and market capital across the world. In making this assessment, note that we have done the following:

We have counted all interest bearing debt as reported by the company on its most recent financial statements. We use this book value of debt as a rough equivalent to the market value of debt because there is no observable market value for much of the debt taken by companies. While there are ways of converting book value of debt to market value of debt, they require inputs on debt maturity that are not available for many companies.
We have computed the lease debt using lease commitments and an estimated cost of debt for each company.
To compute the net debt, we subtract out the cash and marketable securities that the company reports on its latest financial statements.
Since debt to a financial service firm is more raw material than capital, and determining what comprises debt is almost an unsolvable puzzle, we have excluded banks, insurance companies and brokerage firms/investment banks from my sample.

Recognizing that the most recent financial statements for most companies in January 2025 update are from September 2024.

Doing the same analysis across industries, again excluding financial service firms, the industries with the highest debt to market cap ratios and the ones with the lowest are listed below:

lowest debt to market cap ratio

highest debt to market cap ratio

All of the numbers reported above for debt include the lease debt.

6.2 Earnings & Cashflow Coverage

As we noted earlier, companies that look lightly levered can still face a significant burden if their earnings and cash flows are insufficient to meet debt payments. In the table below, we look at the regional differences on debt as a multiple of $EBITDA$ and interest coverage ratios:

Extending this analysis to industries and looking at the ten industries with the most buffer and the ten with the least.

industries with the most buffer

industries with the least buffer

6.3 Lessons learned

Every crisis teaches investors and companies lessons that are temporarily learned, but quickly forgotten. This is a reminder to firms that debt, while making good times better for equity investors, makes bad times worse. For some of these firms, that debt will threaten their continued existence and result in liquidations, fire sales and distress. For others, it will create constraints for the near future on growth and investment, and change business plans. For firms that are lightly burdened, it may create opportunities, as they use their liquidity as a strategic weapon to fund acquisitions and to increase market share.

7 Dividends

Dividend policy is often treated as an obligation that has to be met by companies. That said, the question of how much a company can pay in dividends is affected by investing and financing choices. If equity is a residual claim, as it is often posited to be, dividends should be the end-result of a series of decisions that companies make. For example, companies that have substantial cash from operations, access to debt, and few investment opportunities should return more cash than companies without these characteristics.

Pre-Covid, dividend policy was governed by inertia (an unwillingness to let go of past policy) and a desire to be like everyone else in the sector. As a consequence, companies often got trapped in dividend policies that did not suit them, either paying too much and covering up the deficit with debt and investment cut backs or paying too little and accumulating mountains of cash.

In this section, we look at how much companies around the world returned to stockholders in dividends (and share buybacks) and by extension, how much cash they chose to hold on for future investments.

7.1 Dividend Policies

Let’s start by looking at the dividends paid by companies with an intent of getting a measure of what constitutes high or low dividends. There are two widely used measures of dividends.

The first is dividend payout ratio, which is calculated by dividing dividends by net income. Dividend payout ratio is a measure of what proportion of earnings gets returned to stockholders (and by inversion, what proportion gets retained in the firm). The distribution of dividend payout ratios, using dividends and earnings from the most recent $12$ months leading into January 2025, is captured below:

Note that more firms (24500) did not pay dividends, than did (23310), in 2025. Among those companies that paid dividends, the median payout ratio is between 39% and 48%.

The other dividend statistic is dividend yield, calculated by dividing dividends paid by market capitalization (or dividends per share by price per share). Dividend yield is a measure of the return that you as a stockholder can expect to generate from the dividends on your investment. The rest of your expected return has to come from price appreciation. Again, using trailing $12$-month dividends leading into and the price as of December 31, 2024, here is the distribution:

The median dividend yield for a globally listed company was between 2% and 3% in 2024.

Any discussion of dividends is also, by extension, a discussion of cash balances, since cash is the residue of dividend policy. In the following graph, we look at cash balances at companies as a percent of the market capitalization of these companies.

You may be a little puzzled about the companies that have cash balances that exceed the market capitalization, but it can be explained by the presence of debt. Thus, if the market capitalization is $\$100$ million and we have $\$250$ million in debt outstanding, we could hold $\$250$ million of that value in cash, leaving us with cash at $150\%$ of market capitalization.

7.2 Industry Differences

If a key driver of dividend policy is a desire to look like the peer group, it is useful to at least get a measure of how dividend policy varies across industries. Using our industry groups as the classification basis, we looked at dividend yields and payout ratios, as well as the proportion of cash returned in buybacks and cash balances. We decided to do the rankings of dividend policy based on the cash balances as a percent of market capitalization, because it is the end result of a lifetime of dividend policy. In the table below, we list the industries that have the lowest cash balances as a percent of market capitalization in January 2025.

While this is a diverse listing, most of these industries are in mature businesses where there is little point to holding cash. One reason for the low cash balances is that many of the companies in these sectors return more cash than they have net income.

At the other end of the spectrum are industries where cash accumulation is the name of the game. Below, we list the industries (not including financial services, where cash has a different meaning and a reason for being) that have the highest cash balances as a percent of market capitalization.

7.3 Regional Differences

If being like everyone else in the sector is the driver of why companies in a sector often have similar dividend policies, can it also extend to regions? To examine that question, we started by looking at dividend statistics (dividend yield, cash dividend payout, cash return payout, and cash as a percent of market capitalization) by country:

7.4 Country Differences

In the table below, we look at the proportion of the cash returned that took the form of dividends and buybacks for companies in different countries in the twelve months leading into January 2025:

The aggregate global stock buybacks were $1.6 trillion in 2024 and aggregate dividends amounted to $2.67 trillion in that same year.

7.5 Lessons learned

Dividend policies will vary in the post-pandemic economy. Put differently, the dividend per share at most companies post-pandemic will be set at a percentage of the free cash flow to equity, with the percentage varying across companies. Investors who are used to receiving a fixed dividend check in the mail will be disappointed. Undoubtfully, it is time for a reset on dividend policy. Thus, a company with stable and predictable cash flows may set dividends at $90\%$ of free cash flow to equity, whereas one with uncertain cash flows and reinvestment needs may set it at $50\%$ of free cash flow to equity. This approach preserves the commitment feature of conventional dividends without the inflexibility.

For the interested reader, I suggest looking into this paper by Professor Aswath Damodaran: Country Risk: Determinants, Measures and Implications.↩︎
In this repository I share the global database with capital structure quality and what each company can sustain in debt as I change the current debt to capital ratio to a target debt ratio. Using this approach, I estimated target capital structures for a total of 42717 non-financial service companies to get a sense of how much punishment businesses can take.↩︎

Tour of World Economies & Businesses

Rafael Nicolas Fermin Cota

2025-02-11