Operating and financial yields from Belgian SMEs still not totally recovered from the 2008 economic crisis

"SME Compass 2011" survey from Deloitte Fiduciaire examines whether Belgian SMEs are prepared to cope with a new crisis
18 October 2011

Brussels, 18th October 2011 – Deloitte Fiduciaire, the market leaders in accountancy and providing tax, legal and financial advice to family-run businesses and SMEs, today announced some interesting results from their SME Compass 2011 survey. This survey compares the financial performance of Belgian SMEs in 2010 with how they performed before the economic crisis erupted back in 2007. Although neither turnover nor yields are back to pre-crisis levels yet, the average SME has since made all the preparations it can to enable it to weather the storm should a new crisis occur.

Some of the major conclusions from the survey:

The SME Compass 2011 survey is unique in that it makes Deloitte Fiduciaire the first organisation to assemble the latest financial data from the 2010 financial year for more than 2,400 companies. The study is also based not only on "public" data, but also on "non-public" information, such as turnover, current accounts and detailed operating costs.

In 2010, turnover and yields were not entirely back to their pre-crisis levels

Over the past three years, only 41% of SMEs recorded real growth in turnover, where the increase exceeded inflation. Industrial companies suffered the most. Nikolaas Tahon, Managing Partner Deloitte Fiduciaire, explains: "A good 62% of industrial companies have had to deal with a fall in turnover. Half of all businesses reported that their turnover was down by at least 8%. And a quarter of industrial companies saw their turnover contract by as much as 26%."

After 2 poor years, 2010 saw operating yields (EBITDA/turnover), net financial returns and the return on capital employed (ROCE) rise sharply. However, the average SME was unable to match the super-yields achieved in 2007. 2010 was also the first time in 3 years that the number of companies reporting negative yields began to fall again.

 % SME  2007  2008  2009  2010
EBITDA/turnover < 0% 10.3% 11.4% 14.0% 10.4%
Net financial yield < 0% 20.2% 22.1% 26.2% 20.9%
Return on capital employed < 0% 23.2% 24.5% 28.4% 24.2%

In 2009, the median operating company saw its EBITDA on turnover slump to 7.7%. By contrast, in 2010, the average SME achieved an operating return of 8.5%. This is a trend that we saw across all sectors, with the exception of services and timber, where the EBITDA on turnover continued to fall last year.

Last year, the average SME actually saw its net financial return rise to 8%. But this is a long way from matching the record figures achieved in 2006 and 2007.

Return on capital employed (ROCE), reflects profitability for shareholders and other providers of funds (banks and leasing companies). At the end of 2009, every 100 EUR invested in the average SME generated a gross yield of just 5.1 EUR. In 2010, that yield rose again to 6.1 EUR. However, this is still 1.2 EUR less than at the end of 2007.

Repayment ability virtually restored

The number of companies calling on bank credit continues to stay close to the 70% mark. This begs the question of whether these companies are generating sufficient net operating cash flow to be able to meet their financial obligations (e.g. settling debts and paying interest charges).

Whereas in 2009, 29% of SMEs were still unable to meet their financial commitments, that figure fell to 24% in 2010. But compared with 2007, there are still 2% more businesses hovering in the 'danger zone'.

At the beginning of 2007, the average operating SME still had a repayment ability of 231%. This formed a nice "buffer" against any further decline in net cash flow while still being able to meet their financial obligations. By the end of 2009, half of operating companies only had a maximum repayment capacity of 194%. In 2010, though, their ability to make repayments had again risen to 227%. At first glance, this places the ability of the average SME to make its repayments back at pre-financial crisis levels.

However, there are significant differences across the sectors. For example, at the end of 2010, the services and retail sectors had a better repayment capacity than before the crisis. Moreover, in both sectors, fewer companies are relying on bank credit than before. In the building industry, by contrast, the ability to make repayments dropped off further last year. At the end of 2010, it was industrial companies that recorded the lowest repayment capacity. And it is also precisely in these sectors that the number of companies turning to their banks for funding rose in the past 3 years.

Stricter control of working capital in Belgian SMEs

Over the past three years, the average operating company managed to lower its working capital from 7.8 EUR to 7.5 EUR per 100 EUR of operating yield. Nikolaas Tahon clarifies the point: "As a result of the crisis, the median SME has had to monitor the various components that define its ultimate need for working capital more closely. On the one hand, this includes the level of stocks held, while on the other there are short-term receivables, which mainly means the amount of credit allowed by SMEs to their customers."

In the average company, the proportion of short-term receivables (excluding current accounts) in the total assets fell from 23.1% at the end of 2007 to 20.8% at the end of 2010. This was also the case in the various sectors, with the exception of retail, where this component was stable at around 17% to 18%.

While the average operating company still had a stock level (stock in relation to total assets) of 18.4% at the end of 2007, this figure fell to 16.7% in 2010. On average, longer-established companies tend to hold higher stock levels than their younger counterparts, but this disparity fell more quickly over the past 3 years. The result is a fall in stocks in relation to total assets from 24.1% to 19.7%. Once again, there are significant differences between sectors. In particular, the 'manufacturing' and 'food & agriculture' sectors have systematically wound back their stocks.

Investment policy: caution is the order of the day

The number of companies investing in 2010 fell in comparison with previous years. The average amount invested by operating companies also fell over the past 3 years from 51,467 EUR in 2008 to 47,409 EUR in 2009 and down again to 46,525 EUR in 2010.

It is mainly the younger companies that have postponed making investments, preferring to play it safe. The opposite applies to companies older than 25 years, which in recent years have raised their budgets from an average of 72,289 EUR in 2008 to 82,544 EUR in 2010.

70% of profitable SMEs are setting all their profits aside and strengthening their real capital base In 2010, three out of ten companies paid out part of their profits to shareholders and/or company owners. This means that 70% of profitable Belgian SMEs have kept all of their profits in the company to strengthen their capital base.

As a result of the wholesale setting aside of profits, the real capital base of SMEs – made up of their own funds plus virtual shareholder equity, i.e. the deferred loans and current accounts of shareholders and directors – has remained approximately static over the past 3 years. At the end of 2009, the average operating company had a real capital base of 49.3%, compared with 47.2% at the end of 2007. In 2010, the average SME had to draw on these reserves in some way, meaning that the real capital base fell as a minimum to 48.9%.

Over the past 3 years, 55% of company owners have seen the value of their SME fall, although values recovered sharply in 2010

The value of the average company fell by 9% in the past 3 years – and the average operating company has seen its value contract by as much as 15% or more. A quarter of SMEs also recorded a loss in value of at least 64%.

"Yet these figures indicate a major recovery in values," says Nikolaas Tahon. "In 2009, half of companies had to cope with a reduction in value of at least 28%. At the time, a quarter of companies saw their value fall by as much as 72% or even more. The M&A market is again running at full speed and hopefully a new crisis will not throw a spanner in the works, because quite a lot of family-owned companies are coming up to a period where there will be a strategic change of generation."

Industrial companies have been the hardest hit. In the past 3 years, half of these businesses have seen their value fall by 27%. Building and retail have also been affected badly. In these sectors, the median company has recorded a loss in value of 17% and 16% respectively. The average SME in the services sector has managed to restrict its fall in value to "only" 9%. Only in food and agriculture have average SMEs seen their value rise by 16% over the 3-year period.

The impact of the economic crisis on the value of longer-established companies has been appreciably greater than for younger businesses. At the end of 2010, companies older than 25 years sustained an average fall in value of 21%. With average SMEs operating for under 10 years, that figure was limited to 9%.