October 23, 2014

How Has the Financial Condition of Private Companies Changed in Recent Years?

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As you might have expected, the financial condition of private companies have changed substantially over the past twelve years, as the country experienced the end of a housing boom; a financial crisis that nearly took down Wall Street; the deepest economic downturn since the Great Depression; and five years of one of the country’s weakest economic recoveries. But you might be surprised to learn how those financials have shifted. The changes aren’t all as one might have predicted.

Let’s start with the obvious. Net profit margins at private companies have recovered steadily since the end of the Great Recession. Using its proprietary database of financial statements of more than 100,000 private companies with less than $10 million in yearly sales, financial data provider Sageworks found that profit margins at private companies increased from a low of 3.2 percent in 2009 to a high of 8.5 percent in 2014.

While improving profit margins themselves are not surprising, the strength of the recovery is. Sageworks data show that profit margins at private companies with less than $10 million in sales are currently far higher than the five-to-six percent range they occupied in the latter years of the housing boom and before the Great Recession.

Private businesses have been reducing their reliance on debt in recent years. Sageworks reports that the debt-equity ratio of private American companies with sales of less than $10 million was 2.8 in 2014, its lowest level since before the Great Recession. Moreover, this low debt-equity ratio is present across different size classes of small companies, Sageworks data reveal.

The timing of the deleveraging is surprising. After plateauing at or near 3.1 for five years, the debt-equity ratio for all private businesses with less than $10 million in sales first began to decline in 2012, Sageworks figures indicate. Moreover, the current debt-equity ratio remains high by historical standards, exceeding the level in any year from 2002 to 2006, when the economy was growing steadily.

The ratio of debt to earnings before interest, taxes, depreciation, and amortization (EBITDA), has been declining since 2010 and is currently 5.6, Sageworks numbers indicate. The downward trend is present for businesses with sales below $1 million; those with sales of $1 million to $5 million; and those with sales of $5 to $10 million. This trend likely reflects improved earnings at private businesses more than reduced borrowing at those companies.

Private businesses still have much more long term debt than they did in the years before the Great Recession. During the years of the housing boom, the ratio of long term liabilities to assets rose from 24.2 percent in 2002 to 31.1 percent in 2006, Sageworks’ analysis shows. Surprisingly, the ratio of long term debt to assets continued to rise during the financial crisis and Great Recession, hitting 38.6 percent in 2010. It then remained steady for three years, before beginning to come down in 2012, reaching 32.5 percent in 2014.

The most surprising trend has been towards increased short-term borrowing. In 2002, short term debt comprised a minuscule 0.05 percent of assets at private companies, Sageworks figures reveal. The ratio has risen steadily over the past 12 years, and now stands at 1.9 percent. While this fraction is not large in absolute terms, its persistent upward trend and consistency across industry sectors and business size classes is unexpected. (The ratio of short term to long-term debt has also increased dramatically – from 0.21 percent in 2002 to 2.74 percent in 2014 – indicating that the effect lies in changes on the liabilities side of the balance sheet.) It’s not clear whether this trend marks a change in the preferences of private business for shorter term debt or whether its access to short term debt has improved faster than its access to longer horizon borrowing.

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Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

2 Reactions

  1. While the increase may seem small, an increase is still good. That means the economy is slowly recovering which is good for everyone – not just private businesses. As this will increase the number of employees and increase the total average income.

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