As the coronavirus disrupted economic life in Germany and around the world in 2020, many people feared that waves of businesses would go bankrupt. But figures compiled by the German Savings Banks Association (DSGV) for business newspaper Handelsblatt suggest that the worst of those anxieties were unfounded.
In a survey of the final 2020 balances of 7000 companies with an annual turnover between EUR 20 and 250 million, the DSGV found that average the equity ratio only declined by a single percent, landing at 34.8. “That is considered very solid,” wrote Handelsblatt.
What’s behind this unexpected strength? We asked DSGV financial balance expert Sebastian Kral.
German companies are in better shape right now than anticipated. How much of this is down to state assistance?
Business liquidity rose an astonishing 20 percent during last year’s crisis. There are a number of reasons. For starters, companies did everything they could to be flexible in terms of costs and were ultimately to limit drops in profits. We calculated that turnover was down around four percent while company earnings fell by a more significant 15 percent. Of course, there were major differences between sectors. In the metal, automotive and mechanical engineering sectors, earnings were down by nearly two-thirds. But only very small sectors, for instance travel agencies, incurred across-the-board losses. The majority of companies still turned a profit. That was the basis for them to increase their liquidity.
Furthermore, savings on investments and in working capital also played a role. When we look at the crisis of 2008-9, we see that company liquidity also rose by 10 percent. So even back then, there was a significant visible increase. The extraordinarily high rise of 20 percent in liquidity in 2020 was certainly influenced by state support measures. Nonetheless, we should recognize that, as in the crisis of 2008-9, companies employed all the operative measures at their disposal to achieve stability – independent of any state assistance.
What are the other major factors that have made companies in Germany relatively robust?
Along with the maintenance of liquidity, another important guarantor of stability is the high level of company equity. Companies again reacted to their results remaining positive by further increasing equity. All told, it rose by around two percent, again with major differences between sectors.
The equity ratio, which expresses the relationship between equity and balance, is around 35 percent at the moment, almost as much as it was in 2019. The slight drop is an accounting phenomenon. Overall, equity actually increased. The ratio is more than satisfactory, particularly considering the course of the economy in 2020.