Corporate Canada’s sales and profit growth slowed in the first half of this year, but cash flow may be the real problem. Rising capital investment is a positive sign, though, as it indicates optimism for the future.

Although cash flow has dropped in both the financial and non-financial sectors of Canadian business, profit margins have risen. Here are some of the trends:

> Cash flow for all industries dropped by 1.4% in the 12 months ended June 30, 2011, vs the corresponding period a year earlier.

> Net margin — net income as a percentage of revenue — remains high at 6.7% for the 12 months ended June 30, vs 6.2% a year prior.

> Gains in revenue and earnings are losing momentum. Net income rose by 5% year-over-year. A year prior, the gain was 25%.

> Year-over-year gains in revenue were in the 10%-11% range in 2007-2008. In the 12 months ended June 30, revenue gained only 5.3% over the preceding year.

> The drop in cash flow reflects a big drop in asset turnover from several years ago. Prior to 2009, $1 of Canadian industry’s assets generated 50¢ or more of sales over 12 months. Now, the ratio is down to 43¢ on the dollar.

> Capital investment, especially in oil and gas, is growing again. For all industries, it totalled $137 billion in the year ended June 30, up by 20% from a year earlier.

> Return on equity dropped to 10.2% for the 12 months ended June 30. It was 10.7% for the 12 months ended Sept. 30, 2010.

> Coverage of debt also has dropped. In the non-financial sector, cash flow dropped to 20% of total debt for the 12 months ended June 30, continuing a decline that started in 2005. For financials, cash flow covered 28% of total debt, down from 47% a year prior.

The oil and gas sector is an exception to most of these trends, boosted by a big rise in cash flow and capital investment.

The data from which this analysis comes are in the Statistics Canada publication Quarterly Financial Statistics for Enterprises. The data incorporate balance sheet, income statement and cash flow figures for all corporations in Canada.

The StatsCan report, released in September, puts total assets of Canadian business at $7.3 trillion, 7% more than a year earlier. Operating revenue for the year ended June 30 was $979 billion, a gain of 5.3% over the year prior.

Canadian industries are divided fairly evenly between non-financial and financial sectors, as measured by assets. Capital investment in the non-financial half of corporate Canada has continued its rise since mid-2008, totalling $130 billion in the 12 months ended June 30 vs $29 billion in the 12 months ended June 30, 2008.

But cash flow is lagging. Peaks in cash flow for non-financial industries were at $187 billion during 2006 and $188 billion for the 12 months ended Sept. 30, 2010. In the 12 months ended June 30, cash flow dropped to $158 billion.

For the two largest non-financial industries, cash flow is going in opposite directions. In manufacturing, cash flow has dropped by 41% to $27 billion in the 12 months ended June 30 from the year ended Dec. 31, 2010. In oil and gas, cash flow has been recovering from a huge drop in 2008-09. Between Dec. 31, 2009, and the 12 months ended June 30, oil and gas industry cash flow has risen by 58% to $43.5 billion.

For the financial half of corporate Canada, return on average assets — a key profitability metric in this sector — is flat. It was 1.1% for the 12 months ended June 30; a year earlier, it was almost 1.2%.

ROE, though, has been gaining slowly since hitting bottom in late 2009. ROE was 7.8% for the 12 months ended June 30, unchanged from a year prior but up from the low of 7% in the 12 months ended Sept. 30, 2009. In 2007, the financial sector’s ROE was 13%.

Financials’ operating revenue has been flat to slightly higher over the past two years, totalling $302 billion in the 12 months ended June 30. Net income has followed a similar pattern.

Growth in financials’ assets has accelerated slightly. Average assets for the year ended June 30 were $3.7 trillion, up by 8.6% from a year prior. That was the largest rate of increase since the 12-month period ended Sept. 30, 2009.

Dividends in the financial sector have gone through three growth cycles in the past decade, and are now in a “down” cycle. Payments had barely gained in the 12 months ended June 30 vs a year prior. But in the year ended June 30, 2010, they had increased by 39% year-over-year. IE