Coronavirus Crisis Sees German Medium-Sized Companies’ Equity Fall

German companies’ equity has suffered during the coronavirus crisis. Some 6 percent of companies reported sharp declines. Fully 30 percent of companies have seen their equity ratio fall. In contrast, 61 percent reported no change, and 9 percent even reported an increase. These are findings from a study conducted by the ifo Institute on behalf of the Chamber of Commerce and Industry for Munich and Upper Bavaria. “Equity was just one of many concerns among the companies surveyed. They have also lost orders and their business situation has deteriorated,” says Andreas Peichl, Director of the ifo Center for Macroeconomics and Surveys.

The situation varies from sector to sector and across company sizes: Small and medium-sized enterprises (SMEs) reported higher insolvency risks. This trend is particularly visible among the smallest 25 percent of SMEs. The hospitality industry, the travel industry, and the arts and entertainment industry are experiencing significantly higher declines in equity than the average. Many companies in these industries were healthy before the crisis. Other companies whose equity dropped sharply were already complaining of poor business before the crisis – for example, those in metal production and processing.

This is why one of the recommendations in the study is to strengthen the equity capital of small companies. Measures that support companies whose business development was stable before the crisis make the most sense. “Providing artificial life support for unprofitable companies is not the way to go, because it distorts competition,” Peichl says. An effective instrument to protect equity, for example, would be a temporary extension of the tax profit carryback.