Recession Investigation Part 2-A Bad Bet?

Dec. 15, 2011 - PRLog -- Exxon’s revenue is down $20 billion dollars from $390 billion down to $370 billion and their fiscal calendar ends on December 31st. (So this is on December 31st, 2007 to December 31st, 2010.) Exxon is down 5.13% on their revenues, not bad.  Their gross profit is down $20 billion, from $127 billion down to $107 billion. On the balance sheet Exxon had $34 billion dollars in cash, on 12/31/2007. Exxon, at the end of 2010, had $7.8 billion dollars in cash.  Now that’s a 77% decrease in the amount of cash that Exxon is holding from the end of 2007 to the end of 2010.  So that certainly makes sense for the recession that we’ve had, for the cash to be down 77%. But what about the debt?  With the cash being down 77% you would hope that Exxon’s debt is not up that much.  However, Exxon’s debt went from $7.1 billion to $12.2 billion over the past three years ending 12/31/10.  That means that Exxon’s long term debt during this recession has increased 70%. So as we look at Exxon it is a little bit more inline of what we would expect. Exxon is one of the largest companies in America and its revenue is down, its profits are down, the cash is down, and the amount of debt that it has is up substantially. So Exxon, certainly from looking at their income statement they’ve been hurt.  Looking at their balance sheet they’ve been killed, during this recession.  

Finally, Microsoft’s revenue is up from $60 billion up to $69 billion. Microsoft’s gross profit has gone from $49 billion to $54 billion. So its gross profit is up 11.3%.  As we look at Microsoft’s cash we see that Microsoft’s cash is down 7.5% from $10 billion down to $9.6 billion, which you would expect their cash to be down. But what about Microsoft’s long term debt?  Microsoft’s calendar also ends on June 30th, 2011 for the prior three years.  From June 30th, 2008 when Microsoft had 0 dollars in long term debt, on June 30th, 2011 Microsoft reported $11.9 billion dollars of debt; almost $12 billion dollars of debt! They go from 0 dollars in long term debt to $12 billion dollars in long term debt. Undoubtedly Microsoft has been weakened during this recession with their cash going down 7% and they went from having no long term debt to $12 billion dollars of long term debt, and their revenue and profits are only up 15 and 11 percent, over the past three years.  

So as we look at these four companies we can see that three of them have been weakened during this recession. They have taken on more debt, they have less cash. However, they are able to report higher revenues and higher profits. How are they able to do this?  

Well they have laid off employees, which lowers their expenses, and they’ve also been able to borrow mass amounts of money to prop up and generate these fake revenues and fake profits. Why do I say fake? When you have to go out and borrow money, lots of it, to increase revenue then to me it is not real because you eventually have to pay it back. The only exception to that is Procter & Gamble, who has been able to effectively manage their company during this recession without being hit that badly. One could argue that Procter & Gamble has actually become financially stronger during this recession. Or maybe only a little bit weaker.  

But as we look at this sample of businesses, 75% of the largest companies in America have in fact only minimally increased their revenues and profits and have less cash and more debt. That means in order for them to improve their balance sheets and get stronger financially things are going to have to improve economically. And I don’t know that these companies are going to be able to do that. I don’t know if we’re going to see a stronger economy moving forward. I don’t know that these companies have much more room to continue to lay off people without it affecting the bottom line of the revenue that they’re able to generate.

These companies are betting on an economic boom, to provide them with enough money to repay their debts. “Come now, you who say, “Today or tomorrow we will go to such and such a city, and spend a year there and engage in business and make a profit.” Yet you do not know what your life will be like tomorrow. You are just a vapor that appears for a little while and then vanishes away.” - James 4:13-14

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