Although the stock market looks ahead, seeing tough times coming in the global economy, it already knows that Canada’s business growth has passed a cyclical high. In fact, Statistics Canada has provided the evidence.
StatsCan’s latest financial report on corporate Canada — known as Quarterly Financial Statistics for Enterprises — suggests the peak occurred late in 2010. This report carries data to the end of this year’s first quarter. (Second-quarter seasonally adjusted figures were expected in late September, after Investment Executive went to press.)
The report covers all industries — investor-owned and private — but the results correlate strongly with the large-cap index, the S&P/TSX 60 index. For earnings, the correlation is a convincing 92% between StatsCan’s all-industries total and earnings on the S&P/TSX 60. As usual, the big battalions have dominated. The earnings correlation between StatsCan figures and the S&P/TSX small-cap index, for example, is negative.
The link for dividends is strong, even though dividend figures for stocks in the S&P/TSX indices are prospective (indicated rate for the next 12 months) while StatsCan’s dividend numbers are actually paid. The correlation between StatsCan’s figures and the S&P/TSX 60 index dividend rate is 77%.
There is a big contrast between the two halves of corporate Canada: the financial and insurance sectors have slumped in profitability; the non-financial sector has done well in comparison.
Overall, the StatsCan report says Canadian corporate assets total more than $7 trillion, almost evenly divided between non-financial industries, which possess slightly less than $3.4 trillion in assets, and the financial sector, which has almost $3.7 trillion in assets.
The big contrast in the non-financial sector is between the improvement in profit margins and the inability to push return on equity and assets higher. Figures reported here group the quarterly data into moving 12-month (four-quarter) totals.
The net profit margin (net income as a percentage of revenue) of non-financial industries climbed to 5.9% last year from 2.7% in 2002, after rallying from 4% in 2009. The most recent net margin was 5.7%.
The troubling part for non-financials is cash flow as a percentage of revenue, which reached a high of 7.2% in 2006, dropped to 5.2% in 2008, and managed to get back only as high as 7% in the 12 months ended March 31. Free cash flow — cash available after capital spending — as a percentage of revenue dropped heavily as industry boosted investment strongly beginning in the last half of 2009.
Corporate Canada borrowed in 2009-10 to finance this, as the 12-month increase in total debt ranged as high as 13.8%. As a result, cash-flow coverage of total debt has dropped. Cash flow equalled 22% of debt in 2000, rising to 33% in 2006. Cash flow coverage of debt dropped to 19% in 2009 and has rallied to 25% since.
Profitability, though, has wavered. ROE for non-financials was 11.7% in year ended March 31, down from 12.2% at mid-year 2010 and below the recent peak of 13.7% in 2006. In between, ROE dropped to a low of 8.6%.
Profitability in the financial and insurance sector soared until 2008, with ROE hitting 13% vs 4.9% in 2001. Then came the global financial crisis. Canadian institutions escaped the direct effect, but ROE dropped to as low as 7% in 2009 — and has improved little since.
Return on average assets, a prime gauge of the financials sector’s health, rose to 1.8% in 2007 from 0.9% in 2001-02. The most recent ratio is 1.1%.
Although net margin is not a prime measurement for the financials sector, its direction does have implications, indicating lack of growth. The ratio was 13.7% in the latest 12 months vs 17% in 2007. The key point here is that the ratio was higher before 2001. IE
Big contrast in corporate Canada
Financials have slumped in profitability while non-financials have done well
- By: Dunbar Carlyle
- September 23, 2011 October 31, 2019
- 14:27