Our EM strategists’ analysis of nine non-financial sectors across 18 EM countries has not revealed widespread signs of improved corporate profitability or profit margins:
Net profit margins for EM non-financial companies have dropped to well below their 2008 lows. Notably, the decline is broad-based: seven out of nine sectors have seen their net profit margins shrink. Only technology and consumer services have seen their margins improve.
The return on equity (ROE) for non-financial EM companies has also plummeted below its 2008 lows. Excluding technology and consumer services, ROE has dropped in all other sectors.
Furthermore, the measure of operating profitability – calculated as EBITDA-to-assets – has also been drifting lower. Like other measures of profitability, the drop in this measure is broad-based across sectors. This shows that while EM companies have increased assets, those investments/new assets have not produced additional profits. On the contrary, profits have massively disappointed. As a result, return on invested capital has dropped sharply.
Lastly, another measure of corporate efficiency is assets turnover, calculated as the ratio of sales to assets. This too has plummeted in all sectors except health care.
Amid plunging return on capital and return on equity, leverage has skyrocketed in the majority of EM countries and sectors as highlighted in the next Insight, (Part II) EM Corporate Health: Leverage.