Statistics Canada
www.statcan.gc.ca
Common menu bar links
Study: Indebtedness and liquidity of non-financial corporations
Archived Content
Information identified as archived is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please "contact us" to request a format other than those available.
The indebtedness and liquidity position of non-financial corporations remained at historically favourable levels at the end of the second quarter of 2009, despite the economic downturn that started in 2008.
On the whole, non-financial corporations in Canada entered the economic downturn in mid-2008 with one of their lowest debt loads in the past four decades, and with an improved liquidity position. By mid-2009, their financial position was more or less unchanged, remaining at historically favourable levels.
Corporations' financial position improve until mid-2008
The debt-to-equity ratio among non-financial corporations declined almost steadily from its last peak of 0.92 in 1992 to 0.54 in mid-2008. The pace of the decline accelerated in 2003 when corporations started recording strong growth in profits and increased retained earnings. Net issuances of share capital, another component of a company's equity, also helped to keep corporation indebtedness at historical low levels after 2005.
Corporations also improved their liquidity position since 1998. That is, they held more cash relative to outstanding credit market debt and total assets compared with previous years. At the end of the second quarter of 2008, corporations held $373.4 billion in cash or $514 for each $1,000 in credit market debt.
The decline in non-financial corporations' debt-to-equity ratio was widespread between 2003 and mid-2008, as 10 of 11 non-financial industries entered the downturn with less leveraged balance sheets. Among the largest industries, the energy, wholesale and retail industries posted notable declines in leverage during this period. In addition, these sectors retained more cash and increased their liquidity position.
Note to readers
This release is based on a new study "Indebtedness and liquidity of non-financial corporations" published today in the Analysis in Brief series. Data are from the national balance sheet accounts (NBSA) and from the quarterly financial statistics (QFS) for enterprises program. The NBSA provides a consistent time series for all private non-financial corporations since 1961. The QFS is a survey that compiles balance sheet and income statements for various industry aggregations from 1988 onward, and covers all corporations in Canada except those that are government-controlled or not-for-profit.
A corporation's leverage or indebtedness level is typically measured by using the debt-to-equity ratio. A high ratio generally means a company has been aggressive in using debt rather than equity to finance its growth. Liquidity position is measured as cash holdings relative to the amount of credit debt or total assets. Higher liquidity levels mean corporations are better suited to meet their short term obligations and to implement investment strategies.
There were some exceptions, though, most notably non-energy manufacturers, driven by motor vehicle and parts manufacturers. Leverage ratios for motor vehicle and parts manufacturers tripled to 0.31 between the first quarter of 2003 and the second quarter of 2008.
Economic downturn puts a halt on improving financial position
The combination of low indebtedness and high liquidity for non-financial corporations left them better suited to face challenges arising from the economic downturn and tight financial markets starting in mid-2008. Liquidity was especially important in light of evidence that corporations were having trouble accessing credit. However, the economic slowdown put a halt on this declining indebtedness and increasing liquidity trend.
Since mid-2008, corporations' net profits declined and equity markets deteriorated, slowing the growth of corporate equity. At the same time, corporations' debt load remained more or less stable as credit availability tightened and demand slackened. As a result, the debt-to-equity ratio remained almost constant, varying between 0.54 in mid-2008 to 0.55 in mid-2009. However, this was still at historically low levels.
By the end of the second quarter of 2009, the liquidity position of non-financial corporations stood at $509 per $1,000 of credit market debt, down very slightly from $514 a year earlier. This was just shy of their 2007 levels, which were the highest since 1961 when these data were first collected.
From mid-2008 to mid-2009, while corporate revenue declined and credit markets faltered, indebtedness continued to decline for 7 of the 10 industries that had previously improved their balance sheets. However, these declines were offset by increases in 3 other industries. Energy, wholesale and retail still managed to increase their liquidity position during this one-year period. Overall, 7 industries improved their liquidity position during that time.
Leverage for motor vehicle and parts manufacturers further increased to 0.48 between mid-2008 to mid-2009. Liquidity became an issue for the automotive industry during this period as the cash ratio fell in all quarters in 2008. The ratio rebounded slightly to 0.13 in the first quarter of 2009 before restructuring in the industry helped boost liquidity to 0.20 in the second quarter of 2009.
Definitions, data sources and methods: survey numbers, including related surveys, 1806 and 2501.
The analytical paper "Indebtedness and liquidity of non-financial corporations" is now available as part of Analysis in Brief (11-621-M2009082, free), from the Publications module of our website.
For more information, or to enquire about the concepts, methods or data quality of this release, contact Boran Plong (613-951-2649; boran.plong@statcan.gc.ca), Industrial Organisation and Finance Division.
