It’s Time For Spanish Companies To Go Big

banco españa

Data from the Bank of Spain illustrates a turning point in the accounts of non-financial companies in 2015. That said, against the backdrop of political uncertainty there is a risk that the value of this will not be unlocked so that Spanish companies can face the current challenge of increasing their size. At the same time, Intermoney analysts think that this will help dilute another major risk: the high level of debt based on their capacity to generate cash.

The figures compiled in March by the Bank of Spain regarding Spanish companies’ profitability include information for last year from 896 non-financial firms. The result: a change in direction, as these companies generated gross added value of 5.6% compared with the virtual stagnation recorded in 2014 and the declines which were the dominant trend in 2013 (-4.3%).  Dynamic domestic demand over the last year (+3.8%), combined with a tremendous rise in exports (+5.4%), supported the 2.2% increase in domestic sales and the 9.7% advance in overseas sales.  This disparate performance was reflected in the geographical distribution of the companies’ revenues.

Revenues from Spain fell to 77.5% of the total (-1.3 pp), with the automatic implication that the companies’ overseas business was more important and undoubtedly healthier. EU countries’ contribution to revenues grew by 0.6 pp to 15.9% of the total, while that from other countries was 6.5% (+0.5 pp).

These figures prove that from an internal perspective, the feedback on periods of instability would be less harsh if demand were more diversified.

By sectors, the gross added value of energy fell by 2.6% in 2015 and that of information and communication by 1%. This contrasted with the good performance from industry, +32.9%, and from commerce and the hotel industry (+4.0%).  But let’s go back to the aggregate figures and their improvement, which can also be seen in the companies’ gross operating result. Despite a 2.3% rise in personnel expenses, this increased by 9.3% in 2015, compared with a reduction of 1.0% in 2014 and a 6.7% drop in 2013.

These gross results make us wonder whether non-financial companies’ financial position has improved. According to GDP, their debt ratio declined to 86% in Q4 2015 from a maximum of 117.4% in 2009. Financial charges related to interest fell to 2.4%, thanks to the ECB’s ultra-expansive policy. And in fact, financial costs have fallen in a sustained manner over the last few years, down 9.4%, which explains the almost 90% reduction in interest rates.

Another key figure is the proportion of debt with cost over assets, which reached 45.6% in Q4 2015 compared to 46.3% en 2014.

The debt with cost in relation to the sum of the gross operating result and financial revenues would fall by 31.1 pp to 606.3%. So the trend is positive but the aggregate figure remains alarming. We also need to take into account that after the Spanish economy’s good performance in 2015 and 2016, growth will drift towards levels close to 2%. Since their domestic operations represent the lion’s share of our companies’ business, it’s on the cards that improving this ratio will be more costly.

So, without getting into a discussion of what is a sustainable level, it’s true that the current figures are worrying and well removed from the 356.1% of 2001, having to add on (based on the same calculation criteria) the current 21% charge for interest.

Against this backdrop, and in line with what we highlighted last week in our analysis on the Spanish banking sector, our companies’ future will depend on obtaining more with less and being particularly careful on the costs’ side.

Increasing size will also be important, with the aim of boosting their chances of survival as well as their profitability in the face of the problems arising from their current size. In fact, companies with less than 10 workers, the so-called microenterprises, provide 40.5% of employment in Spain; well off the 29.2% average in the EU or the 19.2% in Germany and the 17.3% in the UK. In conclusion Intermoney’s analysts say that:

Spanish companies’ reduced size restrict both their capacity for generating business and their productivity. The average productivity rate of Spanish firms is 42% lower than German companies or 74% below those in the UK. If this continues, we will still be at a disadvantage with a business fabric of small dimensions which has a limited capacity for tackling its main weak point: debt.


*Image: FotoMadrid /Juan Antonio Jiménez Torres


About the Author

Carlos Díaz Guell
Editor at and, Carlos began his career in financial journalism as founding member of El País. He's been communications director of Bank of Spain, member of the ECC at the European Central Bank, Institutional Relations director at Iberia and editor at La Economía 16 magazine.