French SMEs: profitable but not very dynamic?
If SMEs have below average mark-up ratios - gross operating profit over value added - it is because they are less capital intensive - less capital to be remunerated - and not because they are less profitable. On the contrary, their profitability appears higher both in terms of usual accounting ratios and when measured through their valorisation when taken over by groups. This does not mean that growth reduces profit and that SMEs have no incentive to grow. This strong profitability is less a matter of size than a matter of age. They become less profitable when getting old and this fall in profitability is more accentuated for those who do not grow. This higher profitability can result from a selection effect - only the best SMEs are able to survive. But, with or without selection, one result holds : the underinvestment of existing SMEs cannot be linked up with a problem of under-profitability. It is all the more true that over the last 15 years, the operating profitability of all non-financial societies slightly improved and, thanks to the fall interest rates, their financial profitability distinctly increased. As other firms, SMEs get out of debt, increase dividends and their shareholders' equity. More than other firms, they accumulate cash reserves that substitute to short term credit lines, and whose dominant function is to provide a buffer against potential negative shocks, rather than to prepare future investements. This weakness of investment does not prevent these SMEs from being the main source of job creation. SMEs constitute a pool that feeds the development of bigger companies, either because some of these SMEs turn out to become big firms or because they are ultimately bought by larger groups.