CIBC World Markets, Inc. released a report that revealed that Canada’s corporate sector is healthier now than it was before we went through the recession. The report also noted that the strength of the current system should help the industry get through any minor setbacks in the economy, as it should also encourage those in the know to grab onto any reasonable and available growth opportunities.
The authors of the report, Avery Shenfeld, who is a CIBC Chief Economist, along with Andrew Grantham and Benjamin Tal, note that this is encouraging news, and that businesses across Canada passed the review with flying colors. Shenfeld noted that historically speaking, the country is looking towards a solid outlook for the medium term and that currently composite indicators are strong. Times when the indicator was lower as far as long term trend showed a more stagnant business growth. When that same indicator was on the high side, the investments grew by an average of eight percent. Corporate Canada is definitely on the plus side of that equation.
The report, released by Shenfeld at the Symposium on Canada’s Best Managed Companies, noted that the positive indicator covered a number of sectors and was not being bolstered up by one or two prime industries. He noted that the numbers actually improved, as far as profit margins and cash on-hand when the energy sector was left out of the equation.
The report took a look at niche specific measures. In the debt-to-equity measure, they found that in 2011 that ratio was lower than long term averages in eight of the 12 sectors in the study. As far as cash holdings, they have grown enough that there is a considerable safety net in place in case of unexpected financial downturn or if financing becomes more difficult to acquire. Cash holdings, relating to credit are at a high of 60 percent. That is considerably better than the 20 percent seen back in the 1990s.
Profit margins are also in the healthy range and have been steadily climbing back since the 1990s, with a brief respite during the recession. Equity returns are seeing similar results, even though they were hit much more drastically during the recession. Shenfeld noted that the equity bounce-back was somewhat hindered by the construction and energy industries, two of Canada’s strongest sectors. In 2011 equity margins were lower than the long term average, likely stemming from low natural gas prices. On the other hand the food and accommodation sector saw an equity growth of three times the long term average.
Shenfeld also speculated that the conservative balance sheets and high cash holdings could be a result of management being somewhat pessimistic about the future business climate. Yet the bankruptcy rate for businesses was at its lowest rate in the last 30 years, at three businesses per 1,000. Business sector confidence at the end of 2011 ended on a high note. It's a positive sign for the Canadian economy, and we'll see how positive the signs remain throughout 2012.