Category: Company Rating Analysis

Comparisons of the costs in Europe: an approach from the companies’ analyses [Part 1]

Lately in Italy it is so often talked about the cost of labor and how it adversely affects the economic and financial performance of the companies. Some believe that it is too high (and whenever a cost is not high !) ,while others , a bit more attentive to the real business dynamics, believe that it is in line with Europe, and that the causes of inefficiency Italian business performance are others.

As we in modeFinance have our own assessment of credit risk worldwide, I thought it would be interesting to study the performance of Italian firms , compared with some European countries like France , Spain and Germany . The aim is to be able to understand the underlying dynamics between different states, and really understand where inefficiencies come from. To do this study, very useful data of Bureau van Dijk, a company with which modeFinance has a partnership, have been employed (www.bvdinfo.com).

First of all, we start with the official European data on labor costs, which can be found at the following link; by reading this document it is understood as the cost of labor in Italy is high, but in fact it is pretty much in line with European states (France and Germany show even higher values) .

But what do the financial statements of companies tell us? Surely if we read carefully these data we can find useful answers!

I have selected the companies in this way : I’ve taken the 50,000 companies with the highest turnover in the four countries: Italy , Germany , France and Spain , then I have studied all 200,000 companies , particularly the financial statements of the year 2012 (practically the latest available ones).

Through these companies I have tried to see the various items of financial statements and I have created some indicators that could better represent the distribution of costs . I then determined the distribution of the indicators and compared them to understand the differences and similarities.

1) Analysis of labor costs in absolute terms.

This indicator I have created in this way :

Cost per employee = Total Cost of Employees / Number of Employees

This indicates, for a company, the average cost per employee. I then determined, with the analysis of the percentiles (link) ; distribution of this indicator in different states.

From the graph, we see:

  • Spain definitely has a lower average cost per employee than all other States;
  • France is the highest ;
  • Italy stands at an average level and without too many ” extremism ” showing a very flat distribution (perhaps because companies cannot intervene directly on the cost of employees, as they are decided at national level?)
  • Germany shows extreme values: a lot of differences between high and low values (is the opposite of Italy).

Result: The Italian labor cost is on average with the European one : even the financial statements of the first 50,000 largest companies say it.

2) Profitability Analysis of the companies

At this point , however, I have a doubt: the cost per employee is on average, however, can it be said that the companies are not profitable, is this true?

To understand it, I have created an indicator of profitability.

Profitability = Profit and loss account / Turnover

And I did the same thing as before (calculated on the financial statements and distribution percentiles) :

From the graph, we see:

  • Italy shows the mean lowest profitability !
  • The worst performing companies in Spain are making the worst loss ever (no State loses money as they do)
  • France and Germany’s profitability is the best , Germany is slightly better.

Result: it is true, Italian companies are not profitable.

But at this point the question arises: Italy has not profitability, but the labor costs are in line with other countries: so, where is lost the competitiveness?

In the second part of this post (next week), I will start to give some answers!

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