Letter IEDI n. 927–Businesses in 2018: little reaction of profits and high indebtedness
The year 2018 could have been the time for a more consistent resumption of economic growth. That was not the case, though, and the balance sheets of publicly traded companies show the consequences. The improvement in profitability was timid and very uneven among the sectors, indebtedness remained high and little progress was made in reducing financial expenses.
This Letter IEDI analyzes indicators of the balance sheets of 318 large publicly traded non-financial corporations in 2018. The companies were aggregated in such a way that we can evaluate the performance of the large economic sectors: industry, services and commerce, isolating the effects of giants like Petrobras, Vale and Eletrobras.
On the whole, developments were more favorable in the second half of 2018 than in the first half of the year, when the truck drivers' strike greatly disrupted the production and distribution of goods.
To a large extent, the improvement was related to the existence of higher levels of commodity prices and to changes in Petrobras. On average, companies' net profit margin jumped from 4.3% in 2017 to 7.6% in 2018. Excluding the giants Petrobras, Vale and Eletrobras, the margin went from 4.5% to 5.9%, the same the level of 2014 (5.6%). But this did not happen to everyone.
For the industry (excluding Petrobras and Vale), there was only partial progress. Net profit margin rose from 3.7% in 2017 to 4.6% in 2018, but this move was not enough to restore profitability to pre-crisis levels. In 2014 it was 5.7%.
Beyond modest, this (positive) movement in the industry was very concentrated in few branches, mainly in the extractive sector and in some segments of basic inputs. The group of non-durable and semi-durable consumer goods, in turn, contributed negatively to the recovery of the sector's average profitability.
This means that services and retail companies were those that did present significant improvements in profitability in 2018. In the industry, profitability increased in a limited way, causing indebtedness and financial expenses to remain significant burdens. This is another dimension of the weak industrial performance, whose physical output has gone back to red figures since the end of last year.
For the set of companies as a whole, bank debt maintained the upward trend in 2018, increasing +6.7% to reach R$ 1.5 trillion, driven, among other factors, by the devaluation of the real, in the range of 20%. The industry, in turn, saw its indebtedness rise more intensely: +11% compared to 2017, reaching R$ 414.6 billion, when the giants Petrobras and Vale are excluded from the sample.
Therefore, it is clear that, until last year, the increase in profitability showed little effect on the deleveraging of non-financial corporations, a necessary condition for a new phase of investment expansion to be launched. In the most serious case (the industry), debt levels have remained high since 2015, going from 69.4% of equity in 2014 to 96.1% in 2018.
If there is any favorable aspect in the recent expansion of corporate indebtedness is that, at least, the structure of corporate liabilities has been slowly and gradually shifting from short-term debt to longer-term debt.
In a context in which economic recovery has not made corporate de-leveraging possible, financial expenses have grown significantly, even though the country's interest rates have fallen. To a certain extent, this is because the pass-through from the lower base interest rate Selic to the lending rates to final borrowers has been very low.
As a result, although there was a rise in operating margins in 2018, it was not sufficient to increase the coverage of financial expenses of industrial companies (except Petrobras and Vale). As a result, the 2018 EBIT/Financial Expenses ratio (1.2%) was not only below that of 2014 (1.6%), but decreased in relation to 2017 (1.3%).
Due to services and, especially, to trade —whose dynamism has been more substantial than the industry's and services'— the EBIT/Financial Expenses ratio had a better evolution for the whole group of companies: 1.5% in 2018 against 1.2% in 2017 and 1% in 2014.
The economic-financial results of large publicly traded enterprises still show, therefore, high indebtedness with low profitability. One consequence of this scenario is the low rates of investment. As this is most serious in the industry, which establishes more links with other sectors of the economy, the result could only be the very low economic growth that we have seen.
Even the companies and sectors that presented more positive outcomes showed no signs of resuming investment projects, given the political uncertainties stemming from the 2018 elections. On the contrary, they took the opportunity to reduce the degree of indebtedness or to keep a greater volume of liquid assets.
After a long period of very low levels, unless fixed capital investment presents a significant reaction —some few and rare exceptions in specific sectors would not be enough— the country will be putting its future productivity and competitiveness at risk, notably in the industry where recent improvements were small.