TORONTO—Corporate Canada is in strong financial health, able to weather short term challenges and take advantage of growth opportunities, according to a new composite indicator from CIBC World Markets Inc.
The composite indicator of corporate strength, which tracks corporate performance back to 1990 by measuring nine data points, has never been higher and is now 1.36 standard deviations above its long-run average.
“History points to a solid medium-term outlook when the various indicators in our composite are in a position of strength,” says Avery Shenfeld, chief economist at CIBC, who co-authored the report with Benjamin Tal and Andrew Grantham.
In periods where the indicator has been lower than its long-term trend, growth in business investment has stagnated. When the indicator has been higher, investment growth averages more than eight per cent.
“Corporate Canada has never been in a better position to deal with downside risks and fund investments in growth sectors,” Shenfeld says, noting corporate strength runs across sectors and was not driven up by the performance of one or two major industries.
• Debt-to-equity ratios for 2011 were lower than their respective long-run averages in 8 out of 12 sectors
• Cash holdings have risen to an all-time high of nearly 60 per cent grown and provide a cushion against disruptions in access to financing or a downturn in earnings
• Profit margins at Canadian companies have risen near their 2008 peak. A similar trend can be seen in the return on equity
• Business confidence waned a bit in 2011, it finished the year still slightly above its long-run average
• At only 3 per 1000, the business bankruptcy rate is the lowest in at least 30 years
The new composite indicator also factors export diversification indices, suggesting that while some Canadian exporters may be feeling the pain of a strong loonie, exporters overall are gaining strength through increased diversification in the markets and products with which they trade.
“During the 1990s, Canadian exports became narrowly focused on the U.S.,” he says. “This trend began to reverse at the turn of the new millennium, and has continued to improve. Indeed, rising exports to developing countries in recent years have seen our diversification index improve above its 1990 starting point and maintain an upward trajectory.”