Considering Extreme-Inflation on a Debt-Dependent Industries
Christopher Aldrich PhD, 2026
This blurb introduces the relationship between extreme inflation and the management of debt using examples of national hyperinflation, the distribution of debt in companies from different industry sectors, and company-level debt-management.
1 Sometimes countries experience hyper-inflation
Inflation is the increase in prices over time. Inflation can also be thought about as an increased demand for a currency. A simple model called the quantity theory of money provides a framework for inflation. This model equates the Money supply (M) multiplied by how fast money circulates (V) to the Price level (P) multiplied by the Real output (Q). Increases in the Price level (P) is considered inflation. For example, if the money supply (M) increases faster than the Output of goods (Q), then Price level increases.
Quantity Theory of Money, MV=PQ
A recent example of significant inflation occurred in Turkey when inflation increased from ~13% in 2020 to ~85% in 2023. Turkey’s government was spending more than it was collecting. To augment this deficit, the supply of money was increased to support government spending. Additionally, interest rates were kept low to encourage borrowing. Both actions were meant to spur investment and consumption to increase output (Q). However, a lack of trust in the currency promoted spending and conversion to other assets, increasing the velocity of money (V). The increase in money supply (M) followed by the velocity of money (V) led to price increases.
In another example, Lebanon’s inflation climbed from ~45% in 2019 to ~95% in 2023. Lebanon had its currency LBP pegged to the US dollar. Maintaining the peg required having enough USD on hand to provide LBP for USD at a fixed rate, to maintain central bank reserves, and to pay importers in USD. However, a decrease in USD currency inflow strained the Lebanese central bank. The short-term fix was to print LBP to purchase more USD in order to support the peg. However, the increase in money supply (M) decreased trust in LBP. The decrease in trust caused conversion to other assets and currencies (V). The increase in MxV led to an increase in prices.
Inflation that occurred in either country’s scenario was initiated by different causes. In the Turkey scenario, the country was experiencing a fiscal deficit in a period of growing inflation. In the Lebanon scenario, the country was having issues maintaining its peg to the USD which was further hindered by a down throttling of foreign currency inflow.
2 Some industries are heavily reliant on debt-financing while others are not
Inflation is a macroeconomic phenomena that influences decision making at the company level given the debt-dependence of certain industries and the relationship between inflation and interest rates. Electric and gas utilities, telecommunications and airline companies traditionally operate with greater dependence on debt with a debt-to-capital ratio ranging from 50% to 65%. United and Delta Airlines had 2024 debt-to-capital ratio of 67% and 42%. Large pharmaceuticals companies operate in the 30 to 45% ballpark. Pfizer and Merck posed debt-to-capital ratios of 40% and 43% respectively. Software companies exist in the 10 to 30% range. For example NVIDIA operated at a 30% debt-to-capital ratio in 2023 while Microsoft has lingered around 27%.
The correlation between industry sector and the debt requirements in part relate to the amount of upfront costs required to operate in these spaces. For example, a single new commercial airplane can cost north of $100M. Utilities companies need to install and operate phone towers and power conversion facilities. Pharmaceutical companies require a suite of analytical equipment and large production facilities. Software companies, on the other hand, don’t require as many physical assets that drive value creation or that can be used as collateral. Small companies, startups, and pre-revenue companies may be unable to attain debt financing and often rely on equity.
The figure below depicts the total debt of pharmaceutical (dark blue), utilities (green), and software (light blue) companies against their market capitalization as a metric for size. The diameter of the points represent the relative sizing of respective debt-to-capital ratios. Software companies demonstrate the lowest average debt compared with pharmaceuticals and utilities. Utilities demonstrate the greatest average debt, the greatest debt-to-capital ratio, and the narrowest distribution of debt-to-capital ratio. Interestingly, utilities also present a fairly linear relationship between total debt and market capitalization with a best fit line R2 value of 0.67. Further, utilities segment market cap is limited compared with pharma and software.
Pharmaceutical companies demonstrate both wider distribution of debt-to-capital ratios and a looser correlation between total debt and market cap. Software companies don’t demonstrate total debt increase beyond $20B until the companies are approaching $200B market cap.
To put this in perspective, in 2024 Uber had ~31k employees and market cap of $147B with $11B of total debt. SAP had ~100k employees and market cap of $235B with $12B total debt. Whereas the total debt of utilities companies increased almost linearly with market cap at a rate of 500M in total debt for every additional 1B in market cap. Utilities company Dominion energy in 2024 had ~15k employees, market cap of $56B and total debt of $41B. The largest utilities energy company in the United States by market cap is NextEra which had far less than half of the market cap of SAP, IBM, Oracle, and Microsoft as well as less than half of the employee count but nearly equal or more total debt.
Pharma companies demonstrate a looser correlation between market cap and total debt. Unlike utilities companies with regulated rates, tangible assets and predictable cash flows, pharmaceutical companies have assets of data, patents, and drug pipelines which are uncertain. This difference may explain the increased variance of total debt and debt-to-capital of pharmaceuticals compared with utilities.
Software companies rely the lowest amount of debt compared with pharma and utilities companies. Software companies don’t require the same quantity of physical assets to create value or that can be collateralized. Software companies use debt more regularly for payments, operations and acquisitions.
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Segmenting the companies into three categories of small $0–4B, medium $4–20B, and large cap $20–200B companies show generally increasing debt-to-capital and total debt with the exception of software segment.
Interest rates are structured as a nominal risk-free rate plus other premiums accounting for different types of risk. One such risk is an inflation premium which is meant to account for the decrease in purchasing power as a result of price level increases. If you obtain a $1M loan to buy large equipment and chemical precursors to try to develop a new pharmaceutical drug, then the interest rates associated with your loan account for expectations of inflation. However, in a scenario where hyperinflation occurs within a expedited timeframe, lenders will want to short maturities and increase interest on fixed rate debt while borrowers will want to extend maturities and lock in rates. The ultimate effect of hyperinflation on company net profits will, in part, depend on its industry sector and quantity of debt.
3 Examples of company response to extreme inflation
The approach to debt management in periods of hyperinflation will depend on the type of debt on hand. On fixed-rate loans, the value of debt is reduced by inflation and could benefit the companies borrowing money. However, on floating-rate debt, interest on the debt will appropriately adjust and companies will likely attempt to adjust the loan maturity.
Foreign-denominated debt comes into the picture if a company is purchasing ingredients from foreign countries. An example of this scenario is if a Turkish pharma company purchases precursors from a German company using Euros. On foreign denominated debt, hyperinflation can come in like a wrecking ball. The value of the debt could increase at a magnitude proportional to the home currency depreciation due to the decreased buying power of a single unit of currency relative to the foreign currency. This scenario strains the reserves of foreign currency on hand. In order to mediate the foreign-denominated debt value hike, companies will attempt to increase exports in exchange for foreign denominated currency to bolster these currency reserves. This foreign currency will have more local buying power given the home currency depreciation and it will allow the company to make payments in the foreign currency without trying to convert their devalued local currency.
The following paragraphs highlight three how three Turkish companies in utilities, pharmaceuticals and software managed the hyperinflation leading into 2023.
Logo is a Turkish software company. Logo reduced its long-term debt from ~125M Lira in 2020 to ~5M Lira in 2024 which seems strategic to avoid central bank interest rate hikes in response to the inflation. However, this was driven by paying off lease liabilities. There were fluctuations in short-term debt from 2020 to 2022 of 21M to 64M to 54M Lira. These fluctuations are related to paying off a short-term bank loan as well as from consolidating borrowings with merged companies. Logo relies on large cash and receivables balance more so than debt. Inflation degraded the value of cash and receivables which represented a huge loss of 643M Lira, an amount larger than its net profit. Despite this software company not having major debt problems, they were significantly impacted by the ~80% inflation and reliance on Turkish Lira denominated receivables. To exemplify the reliance on Lira denominated receivables, in a 2025 interim notes, Logo posted trade receivables of 36M in Lira, 869k Lira worth of USD, and 7k Lira worth of Euro.
Enerjisa is a Turkish energy provider. Enerjisa has more debt than cash which seems consistent with the previous discussion on the debt carried by utilities companies. In 2024, Enerjisa had 9.5B Lira in cash and 53B Lira in total financial liabilities. Hyperinflation benefited the company due to their debt in excess of cash. Inflation decreased the value of some of their debt to a greater extent tohan the losses on monetary assets and receivables. However, Enerjisa like many utilities has significant physical assets and inflation increased the carrying value in excess of its historic tax base. This restatement of their assets led to a deferred tax liability that exceeded any monetary gain from having more debt on hand than cash.
Enerjisa more than doubled its total debt from 13B Lira to 31B Lira between 2021 and 2022 in order to support operations. This debt was needed because of a lag between the steep inflation and tariff adjustments by Turkey’s energy regulator, EMRA. Inflation was rapidly increasing energy prices but the tariffs Enerjisa posed to customers were fixed which resulted in losses. As a result of these losses, the working capital outflow was 19% and 30% of EBITDA in 2022 and 2023. In 2024 the regulator enabled a 59% distribution fee increase which was projected to decrease the working capital outflow from 30% to 6%.
Deva is Turkey’s second largest pharmaceutical company that produces generics and active pharmaceuticals. In the period of hyperinflation, Deva relied on short-term liabilities, ~3.7B Lira from bank credit and ~1B Lira from other short-term debt. The company nearly halved its long-term liabilities from 832M Lira to 382M Lira. Similar to Enerjia, Deva has more debt and liabilities than monetary assets such as cash and receivables. Deva also posted a net positive monetary gain of ~1.2B Lira due to the hyperinflation. Inflation decreased the value of its liabilities in excess of the loss on its monetary assets, which is a net monetary gain. Similarly to Enerjisa, Deva accrued a deferred tax liability from the increase in carrying value of its assets beyond its tax base. However, they were able to write down the asset values closer to their tax base through depreciation and impairment which led to a deferred tax income that exceeded the initial deferred tax liability. The extreme inflation increased Deva’s net profit 4x from 851M Lira in 2022 to 3.4B Lira in 2023.
4 Discussion
Industry regulation, company size and debt-structure meaningfully influence the managed response to extreme inflation. Companies operating in the utilities space are subject to possible losses driven by regulator lag. The quantity of assets and the relative amount of debt and cash will impact the monetary gain/loss as well as deferred tax assets/liabilities contributing to net profit. Larger companies with international footprint have the benefit of exporting goods to augment their foreign currency pools.
In the case of the Turkish software company Logo, the cash and receivables dependence coupled with low-levels of foreign currency inflows put quite a strain on the company’s net profit despite operating at relatively lower levels of debt than the pharma and utilities example. In 2023, Logo posted a net monetary loss of 622M Lira with deferred tax income of only 94M. Low debt levels and sole currency denominated receivables sustained across software companies may impose unique industry-specific challenges when faced with hyperinflation.
In contrast to the software company Logo, the utilities company Enerjisa and pharmaceutical company Deva both posted positive net monetary gains in excess of deferred tax losses. This was driven by a decrease of liabilities in excess to the decrease in monetary assets leading to monetary gains bolstering net profit.
Inflation is a phenomena often accounted for by risk premiums. However in instances of extreme inflation in expedited time frames companies take distinct approaches to moderate financing. Contrary to my expectations, it seemed that Deva and Enerjisa came out stronger than Logo due to enhanced net profit due to the positive monetary gain, careful watch of deferred tax liabilities and foreign currency exposure. Whereas, Logo struggled more being a domestic company with lesser foreign currency exposure.
Other notes and figures:
