Find us in the news

Our research

10 Jul 2024
Insight #25

Economic value creation / Profit

From 'Just-in-Time' to 'Just-in-Case': COVID-19's legacy of higher inventories and lower profitability

Since the onset of the pandemic, supply chain disruptions have been a salient feature of economies. Crux of Capitalism data reveals significant inventory building as companies privilege caution over efficiency. By the end of 2022, companies in ten of the world's largest economies had inventories totalling ~2’489 billion USD, a figure almost ~32% (600 billion USD) higher than in 2019. From 2021 to 2022, firms had on average a ~14% higher inventories-to-sales ratio compared to the period from 2017 to 2019, equivalent to additional stocks of one-third of monthly sales. Plumper inventory stockpiles weigh on corporate profitability: in 2022, cutting inventories by one-third of monthly sales would have lifted 5 ppt of US, 9.5 ppt of Chinese, and 10 ppt of German firms into economic value creation territory.

Sára Czégé, Camilla Erencin, Simon J. Evenett, Adam Novak and Felix Reitz
2 Jul 2024
Insight #24

Corporate Turnarounds: Which publicly-listed firms moved from the lowest to the highest quartile of Economic Profit/Assets and how?

Around 2% of firms accomplished ‘turnarounds’ between 2014 and 2019 (before the pandemic scrambled performance data). The communications sector has the highest percentage (4.3%). While firms in the consumer discretionary, industrial, IT, and energy sectors achieved their turnarounds by profoundly raising revenue as well as decreasing their median WACC and their median Invested Capital/Assets ratio, turnarounds in the healthcare and utilities sectors centred on reducing cost of goods sold and other operational expenses. Compared to their less successful peers, turnaround firms were generally larger and had a higher median Revenues/Assets ratio to start with.

Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz
29 Apr 2024
Insight #23

UK Manufacturing: Diamonds in the Sand

The UK government adopted an Advanced Manufacturing Plan in November 2023. To gauge its success a factual baseline is needed. Our analysis reveals lacklustre value creation by UK manufacturing in both absolute terms and relative to G7 peers. Total economic profit (EP) generation fell 45% from 2005 to 2022. But there are pockets of excellence. The Semiconductors & Semiconductor Equipment as well as the Technology Hardware & Equipment sectors, for example, are not only highly profitable—their EPs have also grown by 359% and 196% since 2005, respectively.

Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz
14 Apr 2024
Insight #22

Rising operational profitability of US publicly-listed firms did not translate into higher effective corporate tax rates

As the US presidential election stirs debate on corporate taxes, an analysis on 7,560 publicly-listed US firms reveals that despite rising total economic profits total corporate income tax payments stagnated between 2005 and 2022. On average, two-third of US companies contributed positively to tax revenues, while the remainder paid either no taxes or received tax refunds. It was not until 2022 that taxes paid per firm exceeded levels observed before the Global Financial Crisis. With a pronounced upward trend in economic profits US firms could have born a higher corporate tax burden, albeit at the risk of cutting R&D and advertising. That this has not happened represents a significant public policy choice.

Sára Czégé, Camilla Erencin, Simon J. Evenett, Adam Novak, Kaspar Lichtsteiner and Felix Reitz
7 Apr 2024
Insight #21

Does Wall Street Reward Economic Profit Outperformance?

Economists incline to the view that economic profits (EP) rather than accounting profits (AP) are a better guide to corporate performance. Sceptics might argue, ‘If you are so smart, then the market should reward firms with unusually high EP. Is that the case?’ We checked, and a simple, rules-based investment strategy proposed here would indeed have beaten major benchmarks over the past 10 years (with an annualized return of 17.6%) while featuring very attractive risk/return metrics. Now, we do not give investment advice in the Crux of Capitalism project, but it is intriguing to see whether this particular economic logic is valued in practice in the investment world.

Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz
12 Mar 2024
Insight #20

Automotive industry disruption: the beginning of broad EV adoption

Whether it be the success of Tesla over the past decade or the demands of the energy transition, the rise of electric vehicles (EV) in public consciousness is unquestionable. Since 2010, the economic fundamentals of purely EV-focused firms have strengthened, with economic profits (EP) quadrupling to 120m USD per firm by 2022. When compared to 2.3bn USD per firm for mixed EV and ICE producers, pure EV producers continue to lag behind. Despite concerns around Chinese EV production, US automakers lead the way in terms of EP generation.

Sára Czégé, Camilla Erencin, Simon J. Evenett, Pierre Ledan, Adam Novak and Felix Reitz
29 Feb 2024
Insight #19

Corporate Vampires: The persistence of economic loss-making firms

Firms aren’t supposed to be immortal—competition is supposed to weed out the unviable. However, counterintuitively, some firms persist in generating sustained negative economic profits (EP). Taking a cohort of firms that consistently generate EP losses from 2010 to 2014, we find that 8 years later, 18% of these firms continue to destroy value. At the sector level, utilities and communication services have the highest prevalence of such corporate vampires, while the IT sector displays the lowest persistence. State support could be playing an important role in enabling the survival of ‘vampire’ firms.

Sára Czégé, Camilla Erencin, Simon J. Evenett, Pierre Ledan, Adam Novak and Felix Reitz
19 Feb 2024
Insight #18

Do the Mighty Falter? How often do firms that earn supra-normal profits revert back to the competitive norm?

It is a fundamental law of economics that firms in a competitive market should make zero economic profit (EP) in the long-run. In reality, though, many companies generate excess positive or negative EP. However, we also document a high degree of EP mobility. Every year an average of 3.3% of listed firms transition from a state in which they earn more than 50 mn USD or less than minus 50 mn USD back to the competitive. About 4% of companies go the other way. EP mobility is particularly high in the utilities and energy sectors and in countries with many firms in these industries, such as Brazil and Russia. About 14% of firms, however, stay in a ‘non-competitive’ EP state for at least three years.

Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz
9 Feb 2024
Insight #17

The “Crux of Corporate Taxation”: Do more profitable firms pay more corporate taxes? What do negative cash effective tax rates reveal?

Concerns about corporate tax avoidance have become salient. Crux of Capitalism data reveals a clear positive relationship between a company's economic profitability and its net tax payments. While the percentage of firms with negative cash effective tax rates exhibit cyclical variation, there is an overarching upward trend. In the United States, the share of firms with negative cash ETR rose by 14 percentage points from 2005 to 2022. In China, 13% of listed firms received net tax refunds in 2022.

Sára Czégé, Camilla Erencin, Simon J. Evenett, Adam Novak and Felix Reitz
5 Feb 2024
Insight #16

Are fears of rising corporate distress warranted? A sectoral perspective

A review of contemporary measures of bankruptcy risks in 21 economies shows they vary markedly across sectors. In Q2 2023, for example, 23% of healthcare firms showed a negative Altman Z’’-Score, a commonly used metric of bankruptcy risk. Meanwhile, this was the case for only 5% of utility companies. With the notable exception of the healthcare sector, surprisingly, these percentages have barely risen in recent years. But this may still be the calm before the storm. As higher market interest rates inflate corporate interest expenses, more firms could turn into ‘zombies’ and then witness rising risks of bankruptcy (Altman Z’’-Scores below zero). Monitoring such transitions is necessary going forward.

Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz
22 Jan 2024
Insight #15

Renewable Energy: Not Economically Sustainable

The energy transition requires huge investment into green infrastructure to meet UN climate goals; however, when profits are properly calculated, renewable energies are currently not economically viable. Despite lower capital costs compared to oil and gas firms—2.4% less on average—renewable energy firms struggle to create economic profits. This is primarily due to the large amounts of invested capital required for renewable energy firms to build out their infrastructure. Escaping the gravity of corporate value destruction indeed requires the renewable energy sector to expand and secure benefits from scale or reinvent their business strategies.

Sára Czégé, Camilla Erencin, Simon J. Evenett, Pierre Ledan, Adam Novak and Felix Reitz
8 Jan 2024
Insight #14

Winner-takes-all dynamics are not confined to tech firms or to the United States: Evidence on profit concentration from 21 economies

The notion that commercially unassailable superstar firms generate excess profits has taken hold in the United States. Evidence of the concentration of economic—as opposed to accounting—profits of publicly-listed companies in 21 economies from 2018 to 2022 is marshalled here. This allows for US experience to be benchmarked against other economies. Economic profit concentration is found to be more severe in many other nations. Cross-sectoral comparisons reveal that the IT sector does not have the most concentrated economic profits.

Sára Czégé, Camilla Erencin, Simon J. Evenett, Pierre Ledan, Adam Novak and Felix Reitz
21 Dec 2023
Insight #13

Corporate R&D spending and the flaws of accounting profits: A tale of American exceptionalism, the Chinese dragon, and Japanese stagnation

R&D is an important engine of economic value creation. We find that North American firms accounted for 47% of the world’s corporate R&D spending in 2022, 2.5 times more than their Chinese and European counterparts. Chinese companies, however, now spend 8,000% more on R&D than they did in 2005, while American (+174%), European (+64%), and Japanese (+28%) firms show less growth. The IT, healthcare, and consumer discretionary sectors are the largest R&D spenders. The resilience of R&D spend during 2020 and 2021 varies markedly across sectors and geography.

Magaly Abboud, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz
18 Dec 2023
Insight #12

The end of an era? Corporate capital costs are ratcheting up. How is this playing out across countries and sectors over time?

As central bankers have lifted interest rates to restore their inflation-fighting credentials, the capital costs of firms have risen as well. We find that funding costs are currently much higher for Western firms than for their Chinese and Japanese counterparts. Firms in the energy and IT sectors face particularly changing circumstances. The increase in capital costs between Q2 2022 and Q2 2023 were largest in Russia and South Africa. Capital costs for Italian industrial and energy firms spiked, too.

Magaly Abboud, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz
11 Dec 2023
Insight #11

The sooner the better: How quickly can we learn about the economic profitability of publicly-listed companies?

High quality data that is available fast and for a broad set of countries is hard to come by. Yet, it can be essential for improving economic forecasts and for assessing economic health at time of acute stress. This analysis shows that, for most countries in our sample, the data needed to meaningfully track economy-wide economic profit and corporate distress metrics is available just 45 days after a quarter ends. This is true for all European and North American economies plus Indonesia, Brazil, Singapore, and India. For the United States and Sweden enough data is available after just 30 days.

Magaly Abboud, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz
4 Dec 2023
Insight #10

The ‘Magnificent Seven’ (M7): Assessing their contribution to the performance of US publicly listed firms

By now, the 'Magnificent Seven' “tech” stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – together amount to around 30% of the S&P 500's market cap. Crux of Capitalism data reveals their heft extends beyond that. In 2022, these 7 giants alone accounted for 32% of the economic profit of all firms listed in the US stock market. Plus, with the M7 responsible for 38% of total R&D spending, these companies are central to US innovation ecosystems.

Magaly Abboud, Sára Czégé, Camilla Erencin, Simon J. Evenett, Pierre Ledan, Adam Novak and Felix Reitz
7 Nov 2023
Insight #9

Can our Economic Profit, ICR, and Z’’-Score variables improve key macroeconomic forecasts for Switzerland? A tentative application

In his recent remarks at the ECB Forum Alfred Kammer from the IMF admitted that “forecasting is a humbling process” and that more granular bottom-up data may be needed. Our Crux of Capitalism database can contribute here. In the Swiss context, we show that our firm-level metrics on economic profits and corporate distress may be valuable leading indicators for macroeconomic variables, which can improve key economic forecasts. The mean absolute predication error (out-of-sample) in our preferred forecast model for real Swiss GDP growth, for example, drops by 45%.

Magaly Abboud, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz
1 Nov 2023
Insight #8

Relapse. Is the German economy the Sick Man of Europe once again?

After nearly two decades, claims that Germany is the “sick man of Europe” are making a comeback. Germany is the only major advanced economy expected to see its GDP shrink, the IMF contend. Our firm-based performance data reveals a 50% drop in economic profit for Germany’s publicly-listed firms in the first-half of 2023. The resulting crimp on investments by corporate giants like BASF and Siemens ought to be a major economic policy concern. While other EU countries are also experiencing economic profit declines in 2023, falls in Germany are more pronounced — heightening the imperative of reform.

Magaly Abboud, Sára Czégé, Camilla Erencin, Simon J. Evenett and Felix Reitz
1 Oct 2023
Paper #2

Beware of false profits: how a firm’s true added value can benefit society

Measuring economic profits rather than accounting profits is a far more reliable indicator of a company’s performance, argue Simon Evenett and Felix Reitz. And value-creating firms are well-equipped to help fund sustainability as well as making healthy returns for shareholders.

Simon J. Evenett and Felix Reitz
29 Sep 2023
Insight #7

How much economic profit do Chinese firms generate? Is corporate China catching up with the United States powerhouse?

We examine whether China’s tremendous economic growth this century has a counterpart in significant economic profitmaking by its firms. We find that Chinese companies only started to generate significant economic profits after 2019. The largest firms in the consumer discretionary, IT, and industrial sectors have driven this recent upturn. Yet, these developments appear vulnerable. Furthermore, even with the recent increases, Chinese firms only create 34% of the economic profits of their US counterparts.

Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz
24 Sep 2023
Insight #6

Close to the Edge? How many firms around the world are in or close to corporate distress? And how do our results differ from others?

As interest rates rose in many economies, fears of a “hard landing” grew. But has tighter monetary policy translated into more firms going into corporate distress? The Crux of Capitalism project tracks three indicators of corporate performance and is well placed to assess how many firms are close to the edge. In 2021 and 2022 already 25% of firms struggled to make their interest payments, 8% showed elevated risk of bankruptcy, and 28% were destroying economic value. Australian and Canadian firms appear to be especially vulnerable, while fewer Japanese and Swiss counterparts are in danger.

Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz
21 Sep 2023
Insight #5

Why assessing corporate distress using our Interest Coverage Ratio and the Altman Z’’-score is revealing

A firm is in distress if its current operations cannot generate the means to meet its interest payments and/or bankruptcy risk is too high. The Crux of Capitalism project generates interest coverage ratios and Altman’s Z’’-scores that, when combined, indicate whether a firm is likely to be in corporate distress. Sorting between viable zombie companies and more destined for failure is possible. This approach could support the development of accurate early warning indicators and, during an era of interest rate normalisation, reduce false alarms about unviable zombie firms.

Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz
17 Sep 2023
Insight #4

Outcomes matter: Do aggregate economic profit outcomes align with established metrics about national business environments?

The economic profit measure developed in the Crux of Capitalism initiative is based solely on reported firm performance. As such it departs from established metrics of the national business environment, parts of which are based on perceptions of national policies and institutional effectiveness. Here we compare across countries and over time to assess where our outcome measure confirms or departures from high-profile, established metrics of the national business environment.

Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz
15 Sep 2023
Insight #3

Which economies create the most value? Economic profits and the importance of taking non-listed firms into account

Fair cross-country comparisons of the value created by capitalist economies require accounting for differences in the propensity of firms to list on stockmarkets. We compute the shares of companies listed by country, year, and asset size category and find significant cross-country variation. Adjusting for these differences changes rankings of nations based on total economic profit generated in plausible ways. Adding the contribution of non-listed firms raised the total economic profit generated in the 21 economies studied in the Crux of Capitalism project by 35% on average for the 2014-2022 period. This correction does not alter the US primacy in global economic value creation.

Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz
12 Sep 2023
Insight #2

How much money can our largest corporations spend fixing the world?

Our societies confront a number of critical challenges such as the transitions to a low-carbon economy and to a digital and aging society. Many expect a lot from business, begging the question of how much economic profits are available for any use, including investing in the future of the business. We find that in 2022 publicly-listed firms in 21 capitalist economies generated significant surpluses. Based on our economic profit measures, these companies have at most 2.8 trillion USD to deploy, with notable concentrations in the IT, health care, consumer discretionary, and industrial sectors.

Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz
© 2024 CRUX OF CAPITALISM, SIAW-HSG