Study: Firm Dynamics: Variation in Profitability Across Canadian Firms of Different Sizes, 2000 to 2009

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Profitability, as measured by return on assets, varied in a consistent way across Canadian companies between 2000 and 2009. On average, it was highest among middle-sized firms with 5 to fewer than 20 employees, but it was consistently lower among both the smallest and largest firms.

Return on assets is defined as earnings before interest and taxes, divided by total assets. Return on assets illustrates how effectively a company turns its assets into profit. The higher the return on assets, the higher the payoff.

Profitability gradually increased with the size of firms until it reached a maximum among those with 5 to fewer than 20 employees. The return on assets for such firms was just under 7% in 2000 and was 8% in 2009. After the maximum was reached for this group of firms, profitability consistently fell as size increased.

Chart description: Mean return on assets by firm size class, 2000 and 2009

CSV version of the chart

This relationship between firm size and profitability was observed in most industries and provinces, particularly in the firms with the highest profitability rates.

All classes of firm size, except those with 500 or more employees, recorded increases in their return on assets between 2000 and 2009. Firms with 50 to fewer than 100 employees recorded the largest increases.

Firms with 500 or more employees were the least profitable in 2009, showing rates of return that were lower than in 2000.

One of the factors behind differences in profitability and firm size is risk. This study found that smaller firms tended to exhibit more variation in profitability across firms and over time.