SA firms slightly healthier

Companies are pushing to pull in debt, Experian notes from its latest index on firms’ health.

Johannesburg - Businesses are showing slightly better heath in the third quarter when compared to the previous three months, according to a new survey.

The latest Experian Business Debt Index (BDI), which was released on Wednesday, posted a slight improvement from 0.144 in quarter two to 0.188 in quarter three.

This comes despite weakening economic activity. In the second quarter of the year, SA’s gross domestic product contracted 1.3 percent, and only gained 0.7 percent in the second quarter. National treasury expects to end the year with overall growth of 1.5 percent.

Experian notes the improvement in the health of local companies was largely driven by a reduction in outstanding debtor days – the average number of days it takes a company to receive payment from its customers after issuing an invoice to them; or how quickly cash is collected from debtors.

The third quarter this year saw a welcome reduction in debtor days to an average of 48.7, down from 50.3 in the second quarter. The fall comes off a steady increase in debtor days, rising from a low point of 45.4 average debtor days in the third quarter of 2013, to around 50 days in the previous four quarters, which Experian says is indicative of challenging economic times.

The ratio of outstanding debts of more than 90 days relative to outstanding debts of less than 60 days also declined from 11.6 percent to 11 percent between the second and third quarters, says Experian. Similarly, the ratio of outstanding debts of between 30 and 60 days to debts owed of less than 30 days, declined from 19.6 percent in the second quarter, to 16.6 percent in the last three months.

“It is possible that expectations around continued low economic growth – with no meaningful recovery over the coming year – may have encouraged businesses to refrain from taking on substantial new investments, opting to hold onto their cash balances,” says Experian SA’s MD, Michelle Beetar.

“Instead, it appears they were driven to reduce outstanding debts as far as possible. The prospect of an increase in interest rates might also have encouraged businesses to tighten their belts, possibly reflecting in the reduction in debtor days.”

The third quarter improvement in the BDI shows, while the economy remains weak, it is not collapsing, says Experian. On the contrary, the fact that businesses are not incurring an unduly stretched debtor profile and remain relatively cash flush is helping them withstand the ravages of low revenue growth, it adds.

“Nonetheless, based on current economic growth rate trends and macroeconomic indicators, it still appears likely that a further deterioration in the rate of improvement in business debt conditions will occur in coming quarters.

“Without the certainty of an improvement in the country’s sustainable growth rate, businesses have little option but to adopt a very conservative approach to managing their finances and to reduce risk taking to a minimum,” Beetar added.

IOL