BIG Profits: The Story Behind The Numbers

    JN Fund Managers
    JN Fund Managers

    Since 2015, several public Jamaican companies such as Supreme Ventures, Salada Foods, NCB Financial Group, Jamaican Teas and Pulse Investments have been experiencing significant growth in their profitability. This growth in profits, coupled with broader macroeconomic developments, has helped to fuel the sharp rise in the Jamaica Stock Exchange’s (JSE) Main & Junior Market Indices over the same period.  Jamaica’s Main Market was named the best performing stock market in the word by Bloomberg for 2018.

    The companies are part of a range of industries including gaming, entertainment, manufacturing and financial services indicating a broad lift in the operating environment. But what are some of the key factors that have improved the operating environment of these companies leading to improved profits?

    A Sharp Fall in the Price of Money: Typically, interest rates can be understood as the price of money. The means that high interest rates signal low money supply and low interest rates signal high money supply. Currently, Jamaica has historically low interest rates, which makes capital cheaper to both large and small businesses. The low interest rate environment is the by-product of the Bank of Jamaica’s efforts to stimulate the local economy through an ‘expansionary’ monetary policy. ‘Cheap’ money means enterprises can hire more staff, buy raw material, invest in equipment and make acquisitions at lower costs which increases the odds of boosting revenues and assists with overall cost control. For instance, older, more expensive loans can be replaced by new loans at lower interest rates through refinancing. Hence, due to the lower price of money, businesses can experience higher profits as less revenues will be dedicated to financing costs in the process of growing the business. The lower cost of money also has a positive impact on the ability of customers to finance the purchase of more goods and services which drives consumption.

    Declining Debt to GDP: Jamaica’s Finance Minister, Dr. Nigel Clarke, has indicated that Jamaica’s Debt to GDP Ratio is poised to fall below 100% by March 2019. GDP is Gross Domestic Product or simply ‘economic output’ which reflects how much a country produces. The Debt to GDP Ratio then shows how much money Jamaica owes, in relation to how much value Jamaica produces. A Debt to GDP ratio of 100% is a 1:1 ratio, which means that Jamaica owes $1 for every $1 Jamaica produces. This is a significant improvement from 141% in the 2002/2003 fiscal year which means that Jamaica owed $1.41 for every $1 it produced according to The Caribbean Policy Research Institute (CAPRI).  A declining Debt to GDP ratio means that the country is less reliant on debt as a means of funding economic activity. This has several implications for the productive/business sector. With the government borrowing less from the local investment community to fund its activity, more capital will invariably become available to potential fund business related investment opportunities.

    1. A decline in the country’s debt servicing burden means the government has more resources available to channel towards investing in government programs and capital items such as infrastructure.
    2. A declining debt servicing burden may also reduce the governments need to increase taxes which should support consumption by extension corporate profits.
    3. Finally, a declining Debt to GDP measure is a positive economic indicator for potential international investors which could lead to greater Foreign Direct Investments (FDI).

    Rising Business and Consumer Confidence: Jamaica’s consumer confidence index rose by 27.5 points to the end of the 2018 calendar year to 175.5 according to Don Anderson, Managing Director of Market Research Services. Business confidence also rose at the end of the 2018 calendar year by approximately seven points to 147 points. According to the report, 70% of those surveyed believes that now is the right time for expansion compared to 58% in 2017. Higher levels of business and consumer confidence is typically linked to greater spending in the economy which is evidenced by a record level of transactions which took place in the 2018 Christmas period according to the report.

    In conclusion, these and other macroeconomic factors have created the backdrop for companies to raise funds, make investments and operate at a lower cost. These factors have also supported customer acquisition and facilitated the creation of new markets. Even though GDP still hovers slightly above one per cent, which is reasoned to be low, this is twice the 25-year national average and has seen gradual improvement. The economic atmosphere supports big profits and it’s no coincidence that companies across different sectors are seeing continuous improvement in their financial performance.

     

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