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How well are Germany’s companies prepared?

by drbyos

BMW, Daimler and Volkswagen stop large parts of their car production. The world’s largest tourism group Tui no longer sends vacationers on vacation. The Lufthansa flies only five percent of their program.

Messages unthinkable just a few weeks ago are almost part of everyday life. The fight against lung disease Covid-19 triggers a supply and demand shock in the economy: companies no longer produce, consumers stay at home.

“The comparison with a natural disaster is definitely appropriate,” says the chief economist at Dekabank, Ulrich Kater, “with the difference that we at Corona are dealing with a global situation.”

In the companies, a crisis meeting follows a crisis meeting. Where can you get capital from? Where can savings be made and how? Which suppliers are how liquid? “Every company takes a worst-case approach,” reports Simone Menne, former CFO for Lufthansa, who sits on supervisory boards such as BMW, Deutsche Post and Johnson Control. “That means, depending on the industry, you calculate a certain number of months without a cent in sales and without new loans.”

The Handelsblatt underwent all nearly 120 companies in the stock exchange segments Dax, MDax, SDax and TecDax a balance stress stress test to compare debt, equity and cash flow and to put them in relation. Another decisive factor is profitability, how much of the turnover remains as profit. This expresses the return on sales.

In the crisis, the simple trade maxim is: Cash is King. Kai Lehmann (balance expert Flossbach von Storch)

Cash flow is very important, i.e. the surplus from cash and cash equivalents, which contrasts current income and expenditure. Because even more than in conventional times in the current crisis, according to the balance sheet expert Kai Lehmann from asset manager Flossbach von Storch, the “simple trading maxim: Cash is king!”

The first result is that low interest rates have made companies carefree. Within ten years, the largest listed companies examined have increased their total financial liabilities by a good 400 billion to just under 850 billion euros. According to Handelsblatt calculations, that’s more than ever.

The easier it was for companies to get cheaper and cheaper money, the less discipline they had to save – and the greater their desire to take risks. Conversely, it would be better: “If a company has little debt,” says Lehmann, “the interest burden is also low and there is more room to manage operating expenses.”

A large number of solidly financed companies are faced with a whole range of moderately to weakly and insufficiently capitalized companies. The focus is on the equity ratio. It is about how much of the equity is in the total capital. The higher the number, the better the financial stability and thus independence from banks and bondholders.

Solidly funded companies like Adidas, Merck or Heidelberg Cement have an equity ratio of more than 30 percent. Less than 20 percent – this applies to ten companies – are considered critical. Pleasing: 32 companies have more than half of their equity in terms of total assets. That alone is considered to be very solid and sufficiently financed to survive drops on the revenue side.

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Six companies even have a quota of over 75 percent. The biotechnology specialist has the highest equity ratios Morphosys, the electronics company Aixtron and the internet start-up investment company Rocket Internet with more than 80 percent each.

By contrast, Lufthansa is poorly financed with an equity ratio of only 20 percent. This is especially true in times like now, when 80 percent of European and 90 percent of intercontinental flights have been canceled. But Lufthansa reacted immediately and increased its liquid funds from 3.7 to 4.3 billion euros compared to the previous quarter. In addition, the group claims to have unused credit lines of 800 million euros.

As a precautionary measure, Europe’s largest airline is talking to the government about state aid. The prospects are good because the grand coalition of CDU / CSU and SPD wants to help the companies affected by the corona crisis.

A drastically increased guarantee framework at the State Bank KfW could make half a trillion euros available, according to Minister for Economic Affairs Peter Altmaier. “There is no upper limit on the loan amount,” added Finance Minister Olaf Scholz, “we said that this should be unlimited.”

A three-stage plan should help: starting with guarantees and KfW loans against short-term liquidity problems. The development bank of North Rhine-Westphalia alone, the NRW-Bank, has already received over 1000 inquiries from companies, including stand builders, restaurants, event companies and travel agencies.

If the economic consequences worsen, the government is considering economic stimulus programs up to temporary state holdings in strategically important companies. With all willingness to help, many questions and problems arise for supplicants.

In principle, companies do not have to fear for their existence. The balance sheets provide information about who might be dependent on aid and loans in the near future. Take Airbus, for example: The European joint venture only achieved an equity ratio of five percent in the past quarter – and is therefore underfunded.

“There will be fewer orders in 2020,” said airbus-Chef Guillaume Faury before the French Senate. The aircraft manufacturer received no new orders in February. If the crisis worsens, Europeans should help financially with their prestige property.

Well prepared, the many small and medium-sized companies are going into a downturn away from the stock exchange. This is borne out by the calculations of the German Savings Banks and Giro Association (DSGV) available to the Handelsblatt.

These are based on evaluations of data from several hundred thousand company balance sheets, which represent 50 percent of the total company turnover in Germany and are therefore of general economic significance. According to this, sales in the decade since the last major crisis year 2009 rose by a good 50, profits even by more than 100 percent.

The companies used the boom years to improve their financial cushion. Evidence of this is the equity ratio, which is at an all-time high of just under 39 percent. In the year before the 2008 financial crisis, it was a good four percentage points less. The automotive supplier Elring-Klinger increased its equity ratio from 36 percent (2008) to 41 percent in the past financial year. Debt fell from 124 to just four million euros.

This creates air in the severe crisis of the supplier industry. The family-run producer of lubricants Fuchs Petrolub His already high equity increased again sharply: the ratio rose from 45 to 77 percent. Operating profit before taxes and after interest rose by 135 percent to EUR 382 million within ten years. Debt fell from 124 to just four million euros.

There are also winners

No need to worry if you have enough reserves, a lot of equity and if possible no debt. Just like the brand manufacturer Beiersdorf. The people of Hamburg are fine, their products like Nivea, Tesa and Labello are relatively independent of the crisis.

The Bonn telecom giant is also doing well. It is Deutsche Telekom Highly indebted due to immense investments in new technologies and expenditure for customer acquisition. Net financial liabilities increased from 55.4 to 76 billion euros in one year in 2019. The equity ratio is also just under 19 percent.

In order to repay at least part of the debt and to make future investments, the group lowers the dividend despite the high cash flow of ten billion euros in the past financial year. That shows financial foresight.

Telekom does not have to fear loss of revenue as a result of the crisis. On the contrary: because more people stay and work at home, the need for paid internet services is increasing.

Also Team viewer is in a comfortable location – despite its poor equity ratio of only ten percent. The newcomer to the stock exchange and specialist for services related to home office has been seeing increased demand for its software for remote maintenance, file transfer and video conferencing for weeks. The number of connections in China has tripled since the outbreak of the corona virus.

But such “untouchables” are the exception rather than the rule. Is struck Ceconomy, known by the old name Mediasaturn. Three key indicators call for caution. With an equity ratio of 9.4 in the past quarter, the company is financially weak.

With every euro of sales Ceconomy only achieved a pre-tax profit of 1.1 cents last year. On top of that, the company would need 82 years to pay off its debts from its cash flow. That is long. More than 15 years are considered a lot.

The key figure is calculated from total liabilities minus cash and short-term securities in relation to cash flow. The smaller the number, the faster a company can pay off its debt from self-generated earnings.

Handelsblatt Morning Briefing - Corona Spezial

Even on the health specialist Fresenius After billions in takeovers in recent years, total debt of 27 billion euros. This was offset by a profit of 7.1 billion euros before taxes, interest and depreciation in the past financial year. The debt is almost four times the profit.

With a few exceptions such as the semiconductor specialist Infineon and the virtually debt-free brand group Beiersdorf, which is run by the Herz family, almost all Dax companies have accumulated more debts than they earned last year before deducting the costs.

The worst among all companies examined Thyssen-Krupp with an equity ratio of just 4.8 percent and a negative return on sales of 0.2 percent. With every euro of sales, the conglomerate burned two cents in the past year.

It would take 417 years for Thyssen-Krupp to pay off its total liabilities using the cash flow generated in 2019. No other company has a longer repayment period – apart from the few companies like Heidelberger Druckmaschinen, which recently did not achieve any cash flow.

Thyssen-Krupp has long been in a critical financial situation. To free itself from it, the conglomerate sold its elevator division for 17.2 billion euros. A good price, as experts unanimously emphasize. However, the traditional company is losing its earnings pearl and is even more dependent on the difficult and often loss-making steel business in the past.

Like Thyssen-Krupp, almost all companies have been preparing for the crisis for a long time – but for the crisis before Corona. In order to react to the global economy, which has been weakening since 2018, the board of directors of the 30 Dax groups launched efficiency programs in autumn and winter 2018/19. You want to cut 100,000 jobs with fluctuation, early retirement and severance payments.

In addition, there are savings programs with which companies want to improve their profits by a total of 20 billion euros each year in the future. This corresponds to almost a third of the total net profit in the past financial year. So strokes Bayer 12,000 jobs worldwide, that is ten percent of the workforce, to save 2.6 billion euros annually.

Volkswagen plans to cut costs by three billion euros by 2020 and another three billion euros by 2022. At Heidelberg Cement – according to the motto of CEO Bernd Scheifele “Ten percent always go” – one savings program has long followed another – regardless of whether there is a crisis or not.

A year later it is clear that the decisions were correct and above all far-sighted. Because now the global economy is no longer weak, it is in a state of shock.

Savings programs are all the more valuable. They are only now beginning to take effect and will help to ease the tension in future company balance sheets. Sufficient equity capital as a result of greater savings efforts and reduced expenses are the best prerequisites for this.
Author: Ulf Sommer

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