Life goes in cycles. Up. Down. Up. Down. Business runs that way, too. And so do companies, at times.
So consider one cycle: a cable company is faced with the sad fact that it needs to massively upgrade its old copper wire infrastructure in delivering TV shows and internet, um, "art films"...to fiber optics. The process will cost $8 billion and take 6 years to fully execute. Unfortunately, they don't have a spare 8 gig just lying around. So they have to borrow it.
And yes, profits come in as the company goes along. They borrow $1.5 billion to start; then, after a year, half a bil comes in, so total net debt is $1 bil. The following year, another $2 billion, and the next year, $3.5 billion, and then by the last year, they just need to borrow half a bil more.
As they took out debt, some was paid off. So they never had total debt of $8 billion. Instead, they had peak debt at one point, in one quarter of this process of $6.5 billion. Under the new fiber optic super-zap-it-fast system, they were able to raise prices 20% and massive profits flowed in. The company was then able to pay down its peak debt of $6.5 billion to be a more reasonable and manageable $4 billion pretty quickly.
Peak debt happens in companies undergoing massive capital upgrade cycles. They're painful and risky. Should something go wrong when they are at peak loads, there's a decent chance the whole company goes under. And that would be a horror film, not an art one.
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Finance: What is a Business Cycle?3 Views
Finance allah shmoop What is a business cycle Well here's
a guy giving his cycle the business Yeah the bike
moves forward in time but this little white mark on
the tire while it keeps returning to the same place
again and again and again So yeah that's the foundation
of the notion of business as a cycle time continues
but you know business gets hot then cold then hot
then cold and yeah you get the idea Well why
is this the case Well lots factors They mostly revolve
around the wild pagan dance of greed and fear And
they get exacerbated when governments actively monkey around with the
cost of renting money otherwise known as the raising and
lowering of interest rates And if you're new to this
whole space if you lower interest rates and make money
cheap to borrow you heat up the economy or at
least you encourage it to get hot And if you
raise the cost of borrowing money well then you're going
to try to cool it off And the reason he
might want to do that is if inflation is roaring
right All right well in the us the business cycle
Runs roughly every eight years for what is called the
short cycle of business cycles for reasons only partly known
to humankind the money cycle revolves around the presidential election
cycle when historically every couple of terms the population gets
sick of one process of messing up government and they
choose to elect a new way to mess up government
So that's The short cycle happens every seven or eight
years and you see it in the stock market with
generally meaningful corrections Along that pattern there's also ate a
long business cycle that sees major shift about every quarter
century World wars affected numbers Technology innovation affects the numbers
and other exogenous factors like pollution and labor replacement by
robots Yeah yeah it's coming and healthcare or disease changes
and or big innovations that completely repaint the pavement such
that the tire slipped and turn and twist trying to
keep the bicycle upright The key goal Look outfor bollards