Introduction

Operating expenses rose 12.4% to $2.1 trillion in 2000, slightly lower than the corresponding 12.8% increase in operating revenue. Triggered partly by higher prices, goods, materials and services purchased by enterprises grew 14.3% to $1.6 trillion in 2000. Bookings for depreciation, depletion and amortization increased 10.7% to $91 billion over a 7.5% rise in net capital assets. This was likely due to accelerated write-offs in connection with certain Y2K-compliant assets and also as a result of increased capital investment in the oil and gas extraction and coal mining industries. Growth in operating expenses were also reflected in interest expenses (+12.4%) and indirect taxes (+10.4%). Despite these increases, operating expenses as a percentage of operating revenue remained relatively unchanged, at 92%, over the past five years.

Operating profits grew 18.0% to $189.1 billion in 2000, as Canadian enterprises increased output in response to demand for goods and services (Charts 3). The rate of growth of operating profits receded somewhat in 2000 as compared with 1999 when corporate operating profits advanced 21.8%. Nevertheless, the average rate of growth in operating profits earned by enterprises in the short run (five years) appears very similar to those earned in the long run (ten years). From 1996 to 2000, the average annual rate of growth in operating profits was 10.5% compared to 10.3% earned between 1991 to 2000. In absolute dollar terms, 2000 marks an all-time high in operating profits earned by corporations.

Operating profits in the non-financial industries rose 20.4% to $141.6 billion in 2000; the biggest contributors in terms of the change were oil and gas extraction and coal mining, utilities, motor vehicle and parts manufacturing, wood and paper manufacturing and real estate. Operating profits of the finance and insurance industries on the other hand, whose biggest contributors included banking and other depository credit intermediation, loan brokers and other financial investment and non-depository credit intermediation, rose 11.4% to $47.5 billion. Overall, about 75% of the operating profits were generated by non-financial industries with the remaining 25% by the financial and insurance industries in 2000.

Chart 4 superimposes the real GDP³ trend over the operating profits percentage change. Corporate profits, which measure overall corporate performance, are a major component of the GDP calculation. It is not surprising then that the growth in real GDP has moved in concert with the change in corporate profits. This pattern has held even in the post 1997 period where real GDP rates fluctuated over a relatively narrow range compared to the volatility in operating profits.

Chart 5 shows profit margins by groupings of industrial sectors. The profit margin for all industries rose 0.4 percentage points to 8.2% in 2000. The finance and insurance industries registered profit margins of 20.5%, unchanged from its revised profit margins in 1999. Conversely, the non-financial industries recorded a modest 0.4 percentage points increase in their profit margins. Chart 5 illustrates that over the past ten years the financial sector has consistently enjoyed higher profit margins than their non-financial counterparts. In terms of averages, finance and insurance industries posted a 10-year (1991-2000) average profit margin of 15.8 %, compared to 5.9% posted by the non-financial industries. Overall, the 10-year average profit margin for the financial and non-financial sectors combined was 7.0%.

Chart 6 looks at returns on investment as reflected by the TSE 300 total return index, the return on capital employed (ROCE) and the Canada 10-year benchmark bond yield⁴. Following the 1991-1992 recession, the Canada 10-year benchmark bond yield outperformed the ROCE, likely due, among other reasons, to higher interest rates. This relationship, however, changed in 1997 when the ROCE surpassed the Canada 10-year benchmark bond yield. Since then, the spread between these two measure of returns has widened. In 1999, the spread between the ROCE and the Canada 10-year benchmark bond yield was 1.6 percentage points, compared to 2.0 percentage points in 2000. In 2000, the ROCE rose 0.6 percentage points while the Canada 10-year benchmark bond yield only rose by only 0.2 percentage points. The stock market, on the other hand, gave the biggest return in a decade to investors. After a two-year lull the TSE 300 total return index rose 37.9% in 2000, powered by investors’ high expectations on corporate performance in the wake of the internet and telecommunications boom.

A review of the 10-year and 5-year simple average returns (Chart 7 & 8) reveals a somewhat different picture. Unlike the 5-year average return, the 10-year average return of the ROCE, return on equity (ROE), and the 10-year Canada benchmark bond yield, appear to indicate some convergence. For the 10-year average return, the ROE for all enterprises was 7.5%, while the Canada 10-year benchmark bond yield and the ROCE were 7.4% and 6.3%, respectively. The TSE 300 total return index recorded the biggest reward (15.1%) to investors.

Of the three measures, ROE, ROCE and the Canada 10-year benchmark bond yield (Chart 8), the ROE for all enterprises, partly due to the fact that its calculation does not include debt equity, was by far the highest. However, when the ROCE is compared to the 10-year Canada benchmark bond yield, the ROCE records a differential in return that may be interpreted as risk premium. Except for the 10-year Canada benchmark bond yield, the 5-year average returns of the other measures were higher than their corresponding 10-year averages. The TSE 300 again led all other measures with a total return of 19.4%, followed by ROE (9.9%), ROCE (7.1%) and the Canada 10-year bonds at 6.2%. It must however be noted that although the TSE 300 index is composed of only select enterprises, analysts see its performance as a good reflection of the overall market. Consequently, based on the data presented, it generally appears that Canadian industries reward their investors with higher returns in the intermediate term than in the long term.

¹ Management of companies and enterprises is excluded from the analysis to eliminate certain duplication of data. This industry comprises establishments primarily engaged in managing companies and enterprises and/or holding the securities of financial assets of companies and enterprises, for the purposes of owning a controlling interest in them and/or influencing their management decisions. They may undertake the function of management, or they may entrust the function of financial management to portfolio managers.

² Canadian Economic Observer, April 2001, Statistics Canada – Catalogue no. 11-010-XPB.

³ Gross Domestic Product at market prices, chained (1997) dollars.

⁴ The Canadian 10-year benchmark bond yield is used as a minimum standard threshold return for long-term “risk free” investment. Investors in common shares or stocks would generally expect to get the minimum threshold return plus a few percents as the additional risk premium.