4.1.2. Firm finance

The existence of firms with appropriate levels of debt and profitability has a significant impact on territorial competitiveness

The economic and financial performance of firms is an essential analytical dimension for examining the strengths and weaknesses of a territory. Indebtedness indicators, for example, reflect the tendency to assume risks or conditions that restrict access to business finance. Business profitability indicators are indicative of the capacity for growth, survival and adaptation in the changing business environment. Consequently, the existence of firms with appropriate levels of debt and profitability has a significant impact on territorial competitiveness.

The aim of this section is to describe and update the salient features of the economic and financial situation of Basque businesses. To this end, we consider their economic and financial situation in comparative terms within the Spanish and European context.

The existence of firms with appropriate levels of debt and profitability has a significant impact on territorial competitiveness

Within the Spanish context, various studies produced by Orkestra have identified certain characteristic patterns among Basque firms, such as adequate capitalisation, a lesser propensity to use external finance, and moderate profitability levels in comparison with the rest of Spanish firms. The updated data for 2017 year-end closing show that Basque firms have increased the weight of their equity and reduced the weight of their financial debt. This process, which has also taken place in Spain as a whole, makes firms stronger. In contrast, although profitability has seen positive growth since 2013, it has not returned to pre-crisis levels in the Basque Country, whereas this has already happened in Spain. Lastly, thanks to the decrease in the levels and cost of debt, Basque firms have increased their capacity to manage their debt and the financing costs they bear. Additionally, Basque firms had a higher return on assets (ROA) than the cost of debt in 2017. As a result, finding themselves with positive financial leverage, they could increase the firm’s financial return through debt-financed investment policies, as well as fostering more economic activity and jobs.

For the European comparison, Table 17 shows the variation in different indicators related to the percentage share of the main balance sheet items, income statement items and profitability and indebtedness indicators. Firstly, it is important to note that among Basque firms we are still seeing an upward trend in the share of equity in the balance sheet, whereas in the aggregate benchmark countries, we can identify a slight tendency to increase their leverage. As regards to financial debt, the Basque Country ranks considerably below the EU and trending downward, and it has a higher level of commercial debt.

Secondly, in the last two years, the weight of earnings before interest and taxes (EBIT) has followed a similar trend to the EU. That is to say, the Basque Country is operating with similar profit-margin ratios. For its part, net income in the Basque Country has followed a similar pattern to the EU, although at a slightly lower level. This leads us to infer the existence of relatively weaker financial performance by Basque business.

Basque firms demonstrate a lower capacity to obtain profits from operations in other territories, especially as regards to financial assets

Thirdly, following the crisis, the overall ROA of Basque firms is seeing a recovery, although it still remains below that reported by the aggregate benchmark group. This result appears to be mainly influenced by the profitability of financial assets (return on financial assets), as the profitability level of their operating assets (operating ROA) is similar to that of the benchmark European countries, the latter being the indicator that would better reflect the competitiveness of production activity carried out in the territory.

Lastly, analysing trends in indebtedness indicators such as the debt/EBIT ratio reveals the impact of the lower relative profitability of Basque firms. As regards to covering costs deriving from financial obligations using operating earnings and financial income, Basque business is in a similar situation to Europe. In turn, the trend in apparent cost of debt is downward, reflecting the drop in interest rates (the product of EU monetary policy). And in the case of the Basque economy, it is slightly below the European benchmark.

Table 17. Main indicators of economic and financial position
Table 17. Main indicators of economic and financial position
Source: (1) SABI-Informa Database; (2) Bank for the Accounts of Companies Harmonised (BACH) project

In short, in the last four years, conditions in the macroeconomic environment have been beneficial for the financial development of the fabric of Basque business. However, despite ‘enjoying’ a situation of cheap money and high liquidity, firms continue to show little predisposition to contract debt. Consequently, there thus remains a slight tendency towards deleveraging. For their part, the operating profit reported by Basque firms is similar to that reported by benchmark countries.

  1. Díaz, A., Gil de San Vicente, I., Murciego, A., Sisti, E. and Vivanco, D. (2016). ‘Informe económico-financiero de la empresa vasca’. Cuadernos Orkestra 2016/20, December; Garciandía Tellería, F. and Aguirre Zubizarreta, O. (2009). Informe económico-financiero de la empresa vasca. Una visión sectorial por segmentos de tamaño empresarial. Bilbao: Orkestra; Navarro, M. (2015). Análisis económico-financiero comparado de la empresa vasca. Cuadernos del Informe de Competitividad del País Vasco 2015: Transformación productiva en la práctica. Bilbao: Publicaciones Universidad de Deusto.