OTTAWA — Canadian firms are in a stronger position to withstand a new crisis, or to take advantage of the recovery, than they were before the recession, says a report from CIBC.
Rolling out a new composite index to gauge the state of corporations in Canada, the bank says firms overall are in their strongest position in many years in terms of having low debt, cash on hand and healthy profit margins.
“According to our corporate measure, corporate Canada has never been in a stronger position to cope with any risks they face,” say CIBC economists Benjamin Tal, Andrew Grantham and Avery Shenfeld in the assessment.
“A healthy base for corporate finances should protect credit ratings and corporate bond performance, and also provide a platform for increased capital spending.”
Overall, the economists say firms are “fit as a fiddle.”
It’s not just Canada’s booming natural resources sector that’s thriving, they said. In fact, improvements in cash positions and profit margins are greater when energy companies are excluded from the index.
They credit prudent management prior to the 2008-09 recession for helping firms emerge with sound balance sheets.
Corporations have faced criticism for hoarding cash since the recession’s official end, but the CIBC said that historically an above-average reading in their index has corresponded with higher levels of investments.
The index is comprised of nine key measures including debt, cash on hand, profits and bankruptcy rates.
The index puts the long-term average at zero on its scale and the current reading at 1.36 standard deviations above the long-run average..
Calculating backwards, firms would have scored about 1.00 prior to the 2008-9 slump, falling below zero at the low point of the recession.
Specifically, CIBC said cash holdings as a proportion of corporate debt have risen to an all-time high near 60 per cent, after languishing near the 20 per cent mark through much of the 1990s.
In another measure of health, the rate of bankruptcy in the corporate sector is only about three in 1,000, the lowest in at least 30 years.