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Mar20

Positive economic signs, but confidence lags

Private companies, those millions of businesses that drive job creation and the U.S. GDP, are seeing margins and profits that are higher than they were before the recession, as Sageworks data has shown. The Dow Jones Industrial Average a week ago had its highest close since late 2007. 

But as several indicators of confidence show, Americans – both consumers and businesses – haven’t yet bought into the recovery in a wholehearted way. Why not?

To be sure, confidence has improved. Gallup’s economic confidence index released March 13 showed the highest reading since the organization started tracking confidence on a daily basis in January 2008. The Thomson Reuters/University of Michigan’s Consumer Sentiment Index for February and the latest Consumer Confidence Index from the Conference Board were both at their highest readings in a year. Similarly, the National Federation of Independent Business’ Small Business Optimism Index improved in February and was the second highest reading since December 2007.

NFIB Small Business Optimism Index

But as economic and markets blogger Doug Short on AdvisorPerspectives.com has noted, confidence by several measures remains at a level commonly associated with recessions. 

All of this comes at a time that most major sectors of private industry are seeing continued sales growth and have returned to pre-recession levels or better in terms of profitability, according to data analyzed by Sageworks, a financial information company. Across all industries, adjusted net profit margin has increased to an average of 6.28 percent from 4.87 percent in 2010, surpassing the 5.6 percent margin among all companies in 2006. 

Sageworks’ data indicates that companies continue to operate with decreased overhead in the face of higher sales costs. (Sageworks adjusts net profit margin to exclude taxes and owner compensation in excess of their market-rate salaries; these adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies’ operational performance.)

“That means private companies are making as much profit off of every sales dollar as they used to,” said Brian Hamilton, CEO and co-founder of Sageworks. “Healthy margins are everything.”

Part of the lag in confidence relative to such business trends could be simply a normal part of any economic recovery. It takes time for confidence to recover following a recession, and we may merely be in that middle ground.

“Once burned, twice shy, right?” Hamilton said Wednesday during an appearance on the Wall Street Journal’s News Hub video broadcast. When people lose their job and then get a new one, they don’t usually resume free-wheeling spending the next day, Hamilton noted. Similarly, businesses are cautious after a difficult period. “What happens is these companies get burned in a recession, and then there’s a lag time, about 18 months, where they don’t hire. Now what we’re seeing recently … is they’re starting to get out of the gate and they’re starting to hire, so that’s good.”

Private company sales and margins vs. GDP

But 8.3 percent unemployment is still too high, he said. The jobs environment clearly has many Americans worried about how stable the recovery will be. Uncertainty about Washington’s economic policies that could impact businesses may also be playing a role, as could the ongoing focus of news reports on economic negatives, such as higher gasoline prices.

How important are private companies? While Wall Street focuses on the performance of public companies, it’s important to remember that not all employers in the U.S. contribute to new job creation equally. Out of the twenty-seven million businesses in America, only about 6,200 are publicly traded on listed exchanges. Most others are privately held, and many of them are small businesses. 

No government agency tracks private company performance by itself. But small businesses, which the government considers to be any company with fewer than 500 employees, drive approximately 50 percent of GDP and 65 percent of new job creation. Figures for all privately held businesses, including medium and large private companies, would be even higher, assuming most small businesses (by the government’s definition) aren’t publicly traded.

 

For the entire article featuring Sageworks and analysis, visit Forbes.com.