This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: The Pattern of Corporate Financial Structure: A Cross-Section View of Manufacturing, Mining, Trade, and Construction, 1937 Volume Author/Editor: Walter A. Chudson Volume Publisher: NBER Volume ISBN: 0-870-14135-X Volume URL: http://www.nber.org/books/chud45-1 Publication Date: 1945 Chapter Title: Fixed Capital Assets and Long-Term Investments Chapter Author: Walter A. Chudson Chapter URL: http://www.nber.org/chapters/c9214 Chapter pages in book: (p. 81 - 93) FIXED CAPITAL ASSETS AND LONG-TERM IN VESTMENTS FIXED CAPITAL ASSETS and long-term intercorporate investments both have characters somewhat different from the relatively short- term assets and liabilities discussed in previous chapters, since they represent past prices and revaluations to a considerably greater ex- tent, on the average, than the working capital components. This fact is particularly relevant to the analysis of ratios involving fixed OflS,ith capital assets. A comparison of fixed capital assets with either ¶bar& tp sales or total assets involves two valuations which are, to some extent, related to different periods of time and to different levels rg of prices. Each ratio, therefore, provides a measure of operating tgrc relationships which is less accurate than the ratios for the current items, although we must hasten to add that the latter ratios are areld not completely free of the same criticism, particularly in periods of rapidly changing prices. On the other hand, since long-term assets are not subject to seasonal fluctuations, ratios of these items to sales may express inter-industrial differences more signi- 6 and 41 ficantly than do the ratios for the current items. This is not neces- .Th sarily true of the ratios based on total assets, however, since industiis cyclical and seasonal fluctuations in the other balance-sheet com- Howcnr, ponents may affect the relative proportion of the long-term assets. dl2per. FIXED CAPITAL ASSETS sentcdb Industrial Variations Fixed capital assets of all nonfinancial corporations in the United States in 1937 constituted 56 percent of total assets. This figure reflects the heavy fixed capital investments of public utilities and railroads; the ratios for manufacturing and trade were 39 and 20 percent, respectively. The turnover of fixed capital for all non- financial concerns, measured in terms of sales, was 1.4 times per annum; for manufacturing and trade as a whole, it was 2.8 and 11.5 times per annum, respectively. The trade figure reflects pri- marily the turnover in retail trade; in wholesale trade, where fixed 81 S Pattern o/ FiflttncjaStructure capital assets are notso important, the turnoverwas about three times as rapid as in retail trade. Measured in terms ofcommodity production, the fixed assets of manufacturing and tradingcon- cerns, incorporated and unincorporated, were the equivalent ofsix months' Output.' For manufacturing,fixed capitalassets (at cur- rent valuations) exceeded inventory bya half; in retail trade, the value was almost equalto that of inventory; and in trade, fixed capital wholesale assets were about one-third the size ofinventory. A comparison of the ratio of fixed capital assets to salesarid the ratio to total assets revealsa high degree of similarity in the ings of the minor industrial rank. divisions for both incomeand deficit corporations__a condition that reflectsthe pronounced in fixed capital differences assets among industries (Chart 10and Table C-28 in Data Book). Furtherindication of the marked capital assets differences in among industries is found in the factthat the indus- trial rankings of the ratiosfor 1937 and 1931resemble each other closely and toa greater extent than in thecase of any other bal- ance-sheet account.2 Among the minor industrialdivisions differences in the capital ratios two fixed appear to be based largelyupon differences in tech- niques of production. Relatively high ratios(particularly sales base) on a are found in a number of industriesmaking predomi- nantly producers' goods, such as stone, clay, andglass products, railroad equipment, andvarious branches ofmetal products. At the other end of the scale are industriespredominantlyrepresenta- tive of consumers'goods, suchas clothing and apparel, packing house products, boots and shoes, musicalinstruments, precious metals, and tobacco. A formal test of theclassification according to producers' andconsumers' good3 for theratio of fixed capital to sales reveals that producers' goods industrieshave a significantly higher average (43 percent) than theconsumers' goods industries 1The fixed capital assets of unincorporated enterpriseswere estimated from Census data on sales in thesame manner as was inventory production were secured from in Chapter 2. Data on commodity merly of the Board of Unpublished estimates of Mr. GeorgeTerborgb, for- 2 Governors of the Federal A test of the SEC data for Reserve System. the ratio of fixed capitalto total assets reveals that industrial differencesamong major groups are statistically significant. The major industrial groups, however,are not a very satisfactory basis respect to fixed capital of classification with assets, Since the industrialvariation within these categories is considerable. For example,the food group includes low ratio of fixed capitalto sales, and sugar refining,packing houses, with avery metals likewise include with a high ratio. Textiles and minor industrialgroups with widely differing ratios. C.piiel Ass.ta aisd investment. Char:10RATIO OFFixsu CAPITAL ASSETS TTo'rAx.. ASSETS FOR IN- COMEAND DEFICIT GROUPS OF MINOR INDUSTRIAL DIVISIONS, 1937 Income Corporations Doficit Corporations (P.pent) (Pws.M) 5070605040 3020 10 0 102030 405000 7050 I I MinIng, n...c.t II' Anthracite Bituminous Oth.r mining Iron and stool OIl and gas Sawmill products Cotton goods Petroleum Metal mining ffc Ston., clay, ste. Bakery products Locomotives, etc. !eC.28 Silk and rayon Paper Cflcc,in Chemicals proper Oth.r rubber products he indtii. Liquors Ben., cwiIuIoId, etc. ach óthe. Shipbuilding Knit goods Carpets bat. Other metals Fertilleers Sugar rsllnlng Other wood products two Woolens Other food Metal building materials itech. Airplanes Hardware tlyon a T.xtilss, n...c.t Motor vehicles Other construction Mill products Packing houa. products Canned products Paints uctLAt Soft drinki Factory machinery pr Miscilan.ous machInery AIll.d chemicals Musical instruments Oflic. equipment Printing and publishing predota Radios Retail trod. tccording All other trade Electrical niachin.ry dcapital Agricultural machinery Precious metals Wisi, and ret. trade "fl-I Household machinery Other i.athsr products Shom Construction Tires and tubes Clothing Wholesale trade Tobacco bo Commission merchants II I I I I I I I I 1 807060504030 20 10 0 10203040 50607060 TheMlii' Based on data from Source Rook of Statistics of income for 1937. For composite ids wik of income and deficit corporations, see Data Book (National Bureau of Economic Research) Table C-28. rj aid, fNot elsewhere classified. a 84 Pattern of Financial Structure (30 percent). This difference may reflect a greater degree ofver- tical integration as well as a greater use of heavy, elaborate, and more expensive machinery among concerns in the producers' goods classification. Industrial differences in fixed capital assets are associatedto some extent with differences in the average asset size of corpora. tions, the capital assets being relatively greater among industries that include corporations of large average size. The relationship is stronger for the fixed capital/sales ratio than for the fixed capital/total assets ratio, possibly because of a greater tendency toward vertical integration among the large corporations. Industrial differences in profitability are not strongly relatedto industrial differences in the fixed capital ratios. Themore profit. able groups show a slight tendency toward having low ratiosof fixed capital assets to sales, but no significant rank correlationis evident for the ratio of fixed capital to total assets. Such results are to be expected: A high turnover of fixed capital would be symptomatic of a relatively high level of profitability, other things being equal; on the other hand, there is littlereason why profitable industries, compared with unprofitablegroups, should have rela- tively smaller or larger investments in fixed than incurrent assets, despite the fact that they can afford larger investments in improved machinery and equipment. Thereason for this is that the profitable industries also have larger investments in cash andmarketable securities as well as in inventories and receivables, with theresult that there is little difference between the fixedcapital/total assets ratio among industries of varying profitability. Variations with Corporate Size A popular assumption has been that the largerthe size of corpora- tions the greater their abilityto take advantage of more efficient techniques calling for large fixed capitalinvestments. Do the data on fixed capital assets support this assumption? When compared with sales, the fixedcapital assets of most major industrial groups increase with size sharplyand, on the whole, consistently (Chart 11).Comparisons of the ratios for income and deficit corporations ofthe same industry for thesame year, and of those for 1937 and 1931, reveala high degree of similarity. Superficially, thisstrong positive variation of the fixed Chart11RATIO OF FIXED CAPITALAssrsTO