Worried about Corporate Canada’s chances of withstanding another global economic tumble? Don’t be.
That’s the overwhelming message from a new report released by Canadian Imperial Bank of Commerce. Instead of worrying about other countries’ problems and estimating just how much they will affect Canadian companies, the study looks inward to assess our financial strength. It turns out corporate Canada is ‘fit as a fiddle.’
As CIBC economists Benjamin Tal, Andrew Grantham and Avery Shenfeld put it: “a health check on Canada’s corporate sector shows businesses across the country passing with flying colours.” In fact, the composite index that CIBC uses to assess this strength has never been higher.
Currently, the composite index is 1.36 standard deviations above its long-run average.
So what exactly is this index made up of? Mostly financial metrics: debt-to-equity ratios, cash to credit ratios, profit margins, returns on equity, returns on capital. It also accounts for exports diversification by commodity and country, business bankruptcy rates and business confidence.
Because corporate Canada is sitting so pretty, “even with public sector retrenchment under way, and indications that consumers may not have the same appetite to spend as earlier in the recovery, corporate Canada could be positioned to pick up the mantle and drive economic growth in the years ahead,” the economists conclude.
A very encouraging point: the corporate strength isn’t confined to energy. In fact, CIBC calculated that cash positions and profit margins look better when the energy sector is excluded
Much of the strength stems from Canadian firms’ attempts to get their balance sheets in order prior to the recession. A lot of debt was paid down back then, and now that banks are pretty much desperate to lend corporations money, Canadian firms remain fiscally conservative, keeping debt-to-equity ratios very low. (The notable exception to this trend is mining, with a debt-to-equity ratio one-third about it’s long-term average, reflecting the need to finance big project development.)
Other highlights: Canada’s corporate cash hoard continues to grow, with cash holdings as a proportion of credit hitting new records; bankruptcy rates remain extremely low; and returns on equity are above their long-term averages for every sector but oil and gas extraction and construction.
To calculate the index, CIBC normalizes each metric with respect its long-run averages, and aggregates them using an unweighted average.