private investment has behaved quite modestly since the recovery from the pandemic despite the arrival of European funds. Factors such as rising rates, uncertainty, deteriorating prospects, cost increases, industry problems or regulatory burden can explain, in part, this evolution. This Tuesday, the Bank of Spain published a study that may shed some more light on this discussion: based on data from some 300,000 companies in Spain, it detects that between 2008 and 2022 there is a direct correlation between business investment and profit margins. sales. The latter do not include the part that companies allocate to financial expenses, amortizations, taxes, investment, raising buffers or distributing dividends. “The majority of companies are located in the section in which the relationship between margins and investment is positive,” the study concludes. That is, the higher the margins, the greater the investment.
With data from the balance sheet center extracted from account records, around 85% of companies in Spain increase investment when margins increase. The study does not establish a causal relationship, the bank clarifies. One rubric does not necessarily explain the other, nor the other way around. But it seems that there is a correlation and that for investment to grow, it is established as a precondition that the margins have increased. The companies studied account for 70% of the Tax Agency’s sales data.
However, there is a small group, around 15%, in which investment does not increase when margins skyrocket. These companies have very high margins on sales, over 30%, they are small, very productive, they belong to the commerce sector and have no debt. The latter, although the bank does not specify it, can be decisive: without financing there is usually no investment. Furthermore, very high margins are concentrated in a few companies. There are very few that reach 90% margins on sales. In fact, 90% of companies are below 40% in their gross operating profit.
Another characteristic that the study finds is that the relationship between margins and investment is greater in large companies than in SMEs. This may reflect that they tend to invest more, the document says. “For any level of the margin, the investment rate and ratio are higher in larger companies,” he concludes. Or what is the same: your investment level is higher regardless of the margin.
Margins fell sharply in 2020 after the pandemic. And from there they have been recovering to the point that in 2022 they were even close to or exceeded those of 2019. Regarding the pre-covid period, the increase in margins has been concentrated in those companies that had margins before the health crisis. minors. “On the other hand, for companies with higher margins before the outbreak of the pandemic, these have shown, on the whole, a downward evolution,” he points out. This would imply a certain convergence in the margins, although the bank does not indicate this.
Taking two different moments, between 2008 and 2018 and between 2019 and 2022, the relationship between margin and investment is “practically the same in both periods,” says the supervisor. In any case, several control variables have been taken, such as the sector, size or age of the company, to prevent these factors from altering the robustness of the results.
The message from the Bank of Spain is summarized in that the increase in margins must be accompanied at the end by greater investment. And this same relationship has also been found in other countries. The behavior of both variables has generally been in line, although after Covid investment has recovered somewhat less than the margins. In the bank’s latest forecasts, a moderation of these was also detected to face the salary increases that were occurring in euros. Although such conclusions could be linked to the taxes established on banking and energy, these calculations have been made before taxes and, therefore, from this study it is not possible to know with data whether these taxes have affected investment.
